Nurtured by a Recent Purchase, This Oil Company is Hopefully Gazing Towards 2025 and Beyond with Optimism
Nurtured by a Recent Purchase, This Oil Company is Hopefully Gazing Towards 2025 and Beyond with Optimism
Devon Energy (DVN 0.29%) is having a successful year. The oil firm's traditional operations are operating at full capacity, which was evident in its recent third-quarter financial reports.
However, things are expected to get even better for the oil company in the upcoming quarters. This optimism stems from its recent acquisition of Grayson Mill Energy, which was finalized in late September. Let's delve into Devon's latest quarter and what's in store for the future.
Breaking down Devon's third-quarter performance
Devon Energy produced an average of 335,000 barrels of oil daily during the third quarter, surpassing its predictions by 4%. Total production averaged 728,000 barrels of oil equivalent per day (BOE/d), a 3% increase from the previous quarter.
The company saw a minor boost from its acquisition of Grayson Mill Energy, which added 5,000 BOE/d to its quarterly output. However, the primary factor driving its performance was the success of its Delaware Basin operations, where production increased by 6% compared to the previous quarter.
The company's high production levels led to strong financial results. Devon generated $1.7 billion of operational cash flow during the period, a 8% increase compared to the previous quarter. Additionally, it produced $786 million of free cash flow after funding capital expenditures.
Devon used its free cash flow to return value to shareholders and strengthen its financial position. The company declared a quarterly dividend of $0.22 per share and repurchased $295 million of its own shares. Since launching its buyback program in late 2021, Devon has repurchased $3 billion of its shares, retiring 6.7% of its outstanding shares.
The company did not declare a variable dividend payment during the third quarter. Instead, it used the remaining excess free cash to strengthen its balance sheet, repaying a $472 million debt maturity.
This helped mitigate the balance-sheet impact of the Grayson Mill acquisition, which required Devon to issue $3.25 billion of debt to complete the deal. Despite this debt issuance, Devon ended the quarter with a low 1.1x leverage ratio.
Laying the groundwork for growth beyond 2024
"Looking forward to the remainder of 2024 and into 2025," stated CEO Rick Muncrief in the third-quarter earnings press release, "we enhanced the quality and depth of our asset portfolio with the recent acquisition of Grayson Mill Energy." He added:
This transaction significantly increased our operating scale and improved our outlook for the fourth quarter and beyond. Combined with the operational momentum of our legacy business, this acquisition positions Devon to deliver strong returns throughout the cycle and demonstrates our commitment to creating long-term value for our shareholders.
The company provided a preliminary view of what's ahead in 2025. Devon Energy expects its total production to average around 800,000 BOE/d, while its oil output should be about 380,000 barrels per day. The company anticipates investing $4 billion-$4.2 billion to maintain and expand its production, representing less than 65% of its projected cash flow from operations. Meanwhile, it sees its leverage ratio falling below 1x as its earnings grow and it repays additional debt.
Devon's capital allocation strategy will focus on debt reduction in the near future. Meanwhile, the company will prioritize share repurchases over declaring variable dividends due to the current value of its stock. At $70 oil (near the current price point), Devon trades at a 9% free-cash-flow yield, based on its 2025 outlook. This makes it significantly cheaper than the broader market, which trades at a free-cash-flow yield in the low single digits.
A compelling oil stock investment opportunity
Devon Energy was already performing well before it acquired Grayson Mill Energy. This acquisition will help boost production and free cash flow in 2025 and beyond.
Meanwhile, Devon trades at a reasonable valuation, which it's looking to leverage by repurchasing shares. In total, Devon seems like a compelling investment in the oil sector right now.
- Devon Energy's strategic acquisition of Grayson Mill Energy is expected to enhance its finance prospects, as the deal is projected to significantly increase its operating scale and improve its projected fourth-quarter performance and beyond, ultimately contributing to stronger returns throughout the cycle.
- To further maximize its earnings and create long-term value for shareholders, Devon Energy is planning to prioritize share repurchases over declaring variable dividends, given the current attractive valuation of its stock, which provides a 9% free-cash-flow yield based on its 2025 outlook. This makes Devon Energy an appealing investment opportunity in the oil sector, given that the broader market trades at a lower free-cash-flow yield.