March 6, 2024
Devon Energy Corporation Post 4Q23: In a Better Place
Our view: Management expressed confidence in its outlook indicating improved efficiencies driven by capital re-allocation to more Permian. We still think DVN is a battleground name for 2024, but if the company progresses toward the top of oil guidance heading into 2Q24 there could be a more positive skew. It appears operations are coming out of the trough with more core Permian focus and infrastructure improvements. M&A remains topical, and we think an accretive deal to enhance the inventory runway (Permian/Eagleford, or Bakken) would be rewarded. Stock buybacks likely make up a larger portion of the shareholder return in 1H24.
Key points:
Link to our 4Q23 earnings and 2024 outlook recap: DVN-4Q23 Results
Our 2024/2025 EPS/CFPS estimates decrease 10-11%/1-2%. EPS is lower due mostly to higher non-cash DD&A and both EPS/CFPS are influenced by higher cash LOE costs. At recent 2024/2025 strip commodity prices ($76/ $2.65 and $71/$3.55), our 2024 EPS/CFPS estimates would be 7% lower at $4.82/$10.08 and 11% lower in 2025 at $4.40/$9.58.
FCF outlook. We model $3.2 billion/$2.9 billion of FCF in 2024/2025, representing 11%/10% yields, which is above the large cap peer group average. At strip commodity prices, noted above, we model 2024/2025 FCF at $2.9 billion/$2.4 billion or 10%/8% yields.
Shareholder returns. DVN entered 2024 with an enhanced minimum shareholder return commitment at 70% of FCF payout (prior was 60%). The core return strategy is a growing fixed dividend, supplemented with buybacks and variable payouts. There are two debt tranches that come due by YE25 amounting to ~$1 billion that is planned to be retired with a portion of the remaining FCF.
DVN is using a 10b5-1 plan and has been incrementally opportunistic with buybacks. Management commentary highlighted interest in being more aggressive with buybacks at current stock price levels. We model $1.1 billion in buybacks in 2024. There is currently $701 million remaining on its buyback authorization, so we expect the company to increase its authorization.
For 2024, we model $2.1 billion in total shareholder returns or $3.37/share, down from $4.46/share in 2023. This reflects a 66% return of FCF and 32% of CFO, although more is possible. We allocate returns at 26% fixed dividends, 22% variable dividends, and 52% buybacks.
The fixed dividend amounts to a 1.9% annualized yield, while the total shareholder returns amounts to a 7.3% yield.