I still think you need a fair amount of oil in your portfolio, at least for this year, suggests Glenn Rogers, contributing editor to Internet Wealth Builder.
Unlike previous bull runs for oil, the companies are being much more disciplined and are not frantically drilling new holes. Instead, they are paying off debt and returning gains to shareholders in the form of dividends and stock buybacks.
Devon Energy (DVN) is one of the largest US onshore oil drillers. The company produces approximately 300,000 barrels of oil, more than 125,000 barrels of natural gas liquids, and about 920 million cubic feet of natural gas every day. Devon aims to produce 5% more total volume year-over-year going forward.
The company has a breakeven point of about $30 a barrel. With oil being above $100 these past several months, Devon is making huge financial gains.
Profit soared in the second quarter from a year earlier, boosted by higher production and oil prices and by a streamlined cost structure.
The Oklahoma City-based company reported net income of $1.93 billion, compared with $256 million in the same period of 2021. Earnings per share rose to $2.93 from $0.38 and adjusted earnings per share reached $2.59. Total revenue jumped to $5.63 billion from $2.42 billion.
Production for the second quarter rose to 616,000 barrels of oil equivalent per day (boe/d), up from 567,000 boe/d in the second quarter of 2021. Total expenses rose to $3.13 billion from $2.11 billion a year earlier.
The sales and profit figures beat market expectations. The median forecast of analysts surveyed by FactSet was for revenue of $4.2 billion and net income of $1.56 billion.
The company declared a fixed-plus-variable dividend of $1.55 per share on Devon's second-quarter earnings, a record payout that is a 22% increase from the previous quarter.
Devon raised its production forecast for 2022 by 3% to a range of 600,000 to 610,000 boe/d because of better-than-expected well performance and an acquisition in the Williston basin.
What makes the company different from some of the other oil producers is that it is committed to returning cash to shareholders. Because Devon is not highly levered, it is able to direct a significant amount of profits to investors in the form of a variable dividend based on 50% of excess free cash flow.
The dividend has increased every quarter since March 2021. Of course, the other side of that coin is that the pay-out will be quickly slashed if oil prices drop.
The rest of the excess free cash flow is deployed for stock buybacks. As of the end of July, Devon repurchased 23.9 million shares, or 4% of its outstanding shares, at a total cost of $1.2 billion.
In sum, this is a well-run, disciplined company with low debt, high free cash flow, and a commitment to its shareholders. It’s a solid choice, as long as the price of oil remains high.
