Devon -- August 7, 2021

Locator: 10001DEVON.

Updates

September 27, 2024: Devon completes acquisition of Grayson Mill, effective September 27, 2024. Link here.

July 8, 2024: Devon to buy Grayson Mill, announced.

August 1, 2023: update.

July 4, 2023: update.

February 26, 2023: 4Q22 and guidance, 2023.

October 11, 2002: Rimrock deal complete; wells transferred to Devon; see this post. 

September 5, 2022: Devon and Delvin enter floating LNG vessel agreement.

August 16, 2022: RBN Energy on Devon. 

June 8, 2022: Devon announces plans to acquire RimRock Oil and Gas assets in the North Dakota Bakken. 

May 15, 2022: Devon -- world's fastest growing oil and gas company.

January 8, 2022: corporate presentation, GS Energy Conference.

September 23, 2021: market update.

August 8, 2021: from Simply Wall Street, Sunday, August 8, 2021 --

• just delivered: a major upgrade to near-term forecasts
• most recent consensus:
• revenues: $9.6 billion in 2021
• a sizeable 22% increase in sales over the past twelve months
• per-share earnings consensus: to shoot up 386% to $2.61
  

• per-share earnings consensus: to shoot up 386% to $2.61
• P/E of 20 x 2.61 = $26.1
• P/E of 40 = $104
• P/E of 53 x 2.61 = $138
• 2Q21 earnings:
• adjusted: 60 cents vs forecast of 53 cents
• GAAP: 38 cents vs 32 cents per share
• revenues: $2.417 billion vs $2.38 billion
  
• prior to most recent (new) consensus:
• revenues: $8.0 billion
• EPS: $2.58

Disclaimer: in a long note like this there will be typographical and content errors. Consider this an opinion piece, not a news article, or a business article. Facts and opinions are interspersed and it is often difficult to tell the difference. 

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here. 

Original Post

It's possible I posted this earlier but if I did, I forgot: Devon's quarterly dividend announcement. 

Before we get started with Devon, with regard to investing, some financial advisors and talking heads suggest investors:

• should not take dividends into account when making investment decisions:
• should not chase dividends;
• should see oil companies -- especially the larger ones -- as utilities with regard to dividends
• should see oil companies as mature, and possibly in a dead-end/dying sector (fossil fuel)
• should note that over the past decade (or longer) oil companies have generally been a poor investment
• should see oil companies much the same way most folks see cigarette companies -- their products are dangerous to one's health
  

Keep that in mind as we go through this.

I'm not looking at this as a recommendation for investing one way or the other. I'm mostly interested in looking at Devon's business strategy; and their operations. I really don't care one way or the other about whether to invest in it or not, but I guess it's sort of like a business case to study, but at an incredibly superficial level. 

I'm just thinking out loud, posting some rambling thoughts.

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here.

Part I

But before we get to that, some quick thoughts on the operators in the Bakken. For a list of active operators in the Bakken (a snapshot in time, of course), see this post of August 4, 2021.

This is mostly for newbies to help them get caught up.

The two operators that seem to consistently report huge wells in the Bakken: MRO and WPX.

CLR's wells run the gamut from pretty good wells to excellent wells, with a fair number of duds, but their wells are spread out across the northern Bakken whereas MRO and WPX are very limited in their geographic scope in the Bakken. 

When I see Slawson active again in the Bakken, I know that things are looking pretty good. Privately owned and conservative with regard to drilling in the Bakken, when Slawson is drilling in the Bakken I take note.

In 2020, there were not very many active operators in the Bakken; but now the number of operators actively drilling runs to about fourteen, which is pretty impressive. Most are operating with only one rig in the Bakken. 

CLR is the big exception: six oil and gas rigs and they could possibly add another. 

Enerplus seems to have gotten energized during the plague year (2020) looking for a deal. This past week Enerplus acquired 600 wells from Hess. Based on fast scrolling through the list of wells, it appears that Hess was consolidating their interest in the Bakken to their "roots," for lack of a better word, to Mountrail County, around Tioga. The vast majority of wells that were passed from Hess to Enerplus were in Dunn County. Again, there are "sweet spots" in each county, but of the drilling locations, I've always been more impressed with Dunn than with Mountrail, but that may have more to do with the operators than the geology. Enerplus reports great wells, so the combination, a company with a good track record, and now with more wells in perhaps the best of the four counties on a one well vs one well basis, this is a big deal, something investors need to watch.

Having said that, Hess, after what seemed to be a slow start in the Bakken, is now reporting some nice wells in the Bakken; some very nice wells. 

Whiting remains a mystery for me. I don't know what to say.

The others just seem to be niche players: Oasis, Hunt, Bruin, etc.

Oh, except one niche player: Petro-Hunt doesn't seem to do a lot of drilling but when they do, they seem to get very big wells.

Part 2

The "market." The stock market. Publicly traded companies.

I do not see a pullback, recession, depression in the near future -- let's define near future as the next five years. 

There will be volatility in the market and there could be days, not weeks, with a significant pullback, even exceeding five percent. But that's the nature of the market. But a recession? I just don't see it. If I'm wrong, recessions don't last forever. 

I hear a lot of talking heads talk about "pullbacks" or volatility in the market, but I've not heard anyone talk about an impending recession or depression in the near term; I am hearing stagflation. On the other hand, I am hearing the phrases: coming out of the pandemic; the global economy opening up; and, my favorite, super-cycles. 

The first time I heard about "super-cycle" had to do with Apple. From March 22, 2021:

The massive demand for iPhone 12s was reported in Apple's blowout first quarter, the tech giant's first-ever $100 billion quarter. With the iPhone 12 catapulted to the top of the 5G smartphone market within weeks of its launch, an analyst now says his channel checks show that the so-called "supercycle" continues unabated, and not even a chip shortage can slow it down.

And, although analysts may not have used the term "super-cycle" with regard to commodities, they certainly could have and should have. Graphic pending if I don't forget.

Last night I went through Devon's most recent corporate presentation (a pdf will download). 

I about fell off my chair when I saw slide #9: beginning stages of a new energy cycle. 

Graphic:

• the y-axis: energy market capitalization as percentage of S&P 500
• the x-axis: year, starting in 1999..

As long as I'm posting graphics at this point, I might as well throw in this one, also, from July 22, 2021: 

Part 3

Devon.

Devon, Devon, Devon. What can I say?

We've pretty much completed the earnings season for 2Q21, and it's been a huge quarter for many companies. Many publicly traded companies (and some privately-held companies) are reporting record earnings. It appears that with these record earnings some, not all, companies want to reward their shareholders. It appears the three most common ways to do that: pay off debt; share buybacks; and, dividends. 

Until recently I never paid much attention to how companies rewarded their shareholders. Right now, the main discussion seems to be around "share buybacks" vs "dividends."

Anecdotally, it would seem most investors prefer dividends -- based on what little I read on social media. Interestingly enough, there is an article out there that argues share buybacks are better. I did not save it or link the URL; to me, the argument seemed preposterous. At the other end of the spectrum, dilution, the issuing of more shares might be an argument for share buybacks -- if dilution is bad, isn't concentration good? I don't buy it. I'm in the camp that prefers dividends. Show me the money.

And that brings me to Devon. 

Either I missed this or if I have already posted it, I have forgotten. But quick: Devon. Their next quarterly dividend, what did they announce?

Drum roll: Devon will increase its next quarterly dividend by 44%, and that's on top of a dividend that had been increased in the previous quarter. And after a special dividend already paid this year.

Some argue that Devon was not the first to do this, and some argue that Devon's "dividend" is a play on words, but that's fine. I think it's pretty clever. Devon has a "fixed" quarterly dividend. It may or may not change much from quarter to quarter just as other companies declare quarterly dividends. But in addition to the "regular quarterly" dividend, Devon now declares a "variable dividend."

The "fixed dividend" is currently eleven cents quarterly and the company's target for this dividend is 10% of operating cash flow. I might come back to this later, in fact, I do. See part 3A below.

The "variable dividend" is calculated on a quarterly basis, and is up to 50% of excess free cash flow. Devon does the math on slide 18 of the presentation linked above. 

Part 3A

A digression.

There's been a lot of talk about "discipline" by the shale operators.

"Everyone" is concerned that US shale operators will spoil the $80-WTI party by "excessive" drilling, bringing a lot more oil to market, and depressing oil prices. I think that's a bunch of malarkey, but taking that for what it's worth: what better way for shareholders to force oil companies to remain disciplined than forcing the oil companies to pay a "fixed" dividend based on x-percent of their operating cash flow and a higher x-percent on the excess free cash flow. Put that in writing, with some jargon to allow exceptions, but imagine that: companies will have a line-item expense, or in this case, two line items that "restrict" how much money they have left for drilling operations. And that number is determined and defined" prior to earnings being announced, not after. Sort of like mandatory sentencing guidelines for judges.

Going a step further, perhaps there's even a way for publicly traded companies to borrow against the variable dividend and pay shareholders additional "interest" on the variable dividend that would have been paid had the company not used it for special opportunities, like share buybacks. 

But back to the point I'm making: a defined expense cuts back on money available for drilling and forces "discipline." Maybe "congress" should step in and mandate that if they want to cut CO2 emissions. Congress sets limits on how much, as a percentage, any company can drill based on CO2 emissions. It's a win-win for everyone. LOL. Better: activist investors.

Part 4

So, where were we?

Devon's dividend history is at this link. Note that this is the total dividend, not just the "fixed dividend."

• 2018: 8 cents each quarter
  
• 2019: 9 cents each quarter
  
• 2020: 11 cents in each of four quarters, but a "variable" dividend of 26 cents in August, 2020.
• 2021: this really gets interesting
• 4Q20: 11 cents
• 1Q21: 30 cents (almost triples)
• May, 2021: a "variable" dividend of 34 cents (13% more than the quarterly dividend, and this was an additional dividend on top of the quarterly dividends)
• 2Q21: 34 cents (13% increase over the first quarter dividend; identical to the special dividend paid a month earlier)
• 3Q21: a whopping 49 cents (fixed plus variable) -- that's a 44% improvement over the previous quarter

So, in one fell swoop, Devon:

• rewards their shareholders, and,
• forces discipline in operations (drilling)

Now, just for the fun of it, let's do what some folks do:

• so far this year, $1.47 paid out in dividends; assume 53 cents for the last quarter, working out to $2.00 for the year, divided by current price of $27 and voila, an indicated yield of 7.4%. 

Someone much smarter than I and who is on my top shelf of energy analysts, Alex Kimani, has already done that. See this link.

Devon paid an $0.11/share regular dividend and a $0.24/share variable dividend during the quarter, implying an annualized 5.5% yield. Further, the company has forecast a dividend yield of more than 7% for 2021 if current trends hold, illustrating its commitment to return more capital to shareholders in the form of dividends whenever cash flows permit.

Some Wall Street analysts have pointed to the potential for DVN to sport a dividend yield of as high as 8% by year-end.

Eight percent.

Part 4A

Discipline. 

In part 4 above I clearly stated that if shareholders limit the amount of capital available, then, all things being equal production will stay flat. 

Hold that thought.

While working on part 4, this headline, over at oilprice, suddenly pops up: African oil producers struggle to raise oil production as investment lags. Wow. Proves my point. LOL.

Part 5

Devon: the company's operations.

Devon operates in the five big shale plays in the US. There are very few operators that drill in all five: the Permian, the Eagle Ford, the Bakken, the Anadarko, and the Powder River Basin.

PXD got a lot of (positive?) press by buying two companies in the Permian this past year. 

I don't know how much press DVN got when it acquired WPX earlier this year but, wow, talk about taking advantage of a great opportunity. There are a lot of issues with WPX but no more than any other company, I suppose. That can be debated. I consider it an incredible piece of work on the part of Devon. With the expansion of the DAPL now a "done" thing, the WPX purchase seems even more timely.  I think the deal was announced in 2020; closed in 2021.

[Note: I am wrong on this one. In fact, the WPX deal was all about the Permian; the Bakken was just a small piece of this deal at least for the headline. I'll leave this in as I've written it but WPX was all about the Permian for the Devon.]

The DVN-WPX deal is tracked here and at the sidebar at the right, under "Deals -- 2020." 

From my perspective, WPX is small in the big scheme of things with regard to shale, but despite falling behind New Mexico, North Dakota oil production (94% of it Bakken right now) is still in third place, and very close to #2, among the states. If Devon was casting about to look for another shale play, they couldn't have done much better than to grab WPX. WPX may be a small operator in a small play, but bang for buck, WPX is really reporting some great wells. 

I had forgotten this: 

With a combined capital structure involving $6 billion in debt against $6 billion in equity, and daily production volumes of roughly 525,000 barrels per day of oil (and natural gas equivalents), the new Devon will be bigger than Apache Corp and Marathon Oil, and just a notch below EOG Resources.

By the way, how many active rigs does WPX/DVN have in the Bakken right now. Remember, WPX is reporting some great wells. How many active rigs? Zero. Nada. Zilch. As least as reported by the NDIC. Devon is making a lot of money in the Bakken and they aren't even drilling.

Interesting sidebar: at one time Oasis said it used cash flow in the Bakken to provide seed money for drilling in the Permian; one wonders to what extent that holds true for Devon.

Rigs don't matter.

Part 6

Devon: so what does participation in the five main shale plays in the continental US give Devon? 

FLEXIBILITY.

Some plays are oilier than other; some plays are gassier than others. Natural gas, right now, might just be a tad better than oil -- of course, a lot of this depends on hedging. Devon doesn't mention hedging in their most recent presentation which suggests to me they hedge and that's not the place to be right now. 

Having positions in all five plays givens Devon to focus on the play(s) that is/are performing the best at any given time. I forget now, but I think I read somewhere that Devon is going back into one of the five plays now that natural gas is doing well. I also forget, but I think I read that Devon had brought on line two huge wells but deliberately choked them back saying they did not want to bring them into a low-cost environment -- that was probably last year. 

A lot of operators have some flexibility, others have a lot of flexibility. But just 'cause one has flexibility, doesn't mean it works. The CEO/COO need to be nimble and to take advantage of that flexibility. Reading Devon's corporation presentation and articles in the free press about Devon suggest that the company has been very, very good in this regard. 

Part 7

So, here we have a company whose priority seems to be to reward shareholders through dividends. The way the company calculates these dividends is transparent and defined. Devon says it has the highest dividend yield in the S&P 500 index. Did anyone know that? In fact, see slide 7 of the linked presentation:

• Devon is ranked #1 with regard to dividend yield in the S&P 500 by a large margin
• the dividend is seven times higher than the average yield in the S&P 500
• the dividend payout is comfortably funded within free cash flow

So, here we have a company that doubled in size after acquiring WPX, and is now almost the same size as EOG.

So, here we have a company with assets and interest in all five major US shale plays.

So, here we have a company that seems to be successful on taking advantage of its flexibility.

Part 8

Operations.

For the most part from the company's website as well as other sources as noted.

Delaware Basin:

• Texas and New Mexico
• 400,000 net acres (huge)
• current focus: Wolfcamp, Bone Spring, Leonard and Delaware formations

Eagle Ford:

• DeWitt County, TX
• world-class light oil
• some of the highest rate-of-return drilling opportunities in North America
• 82,000 net acres for $6 billion, link here, Nov 20, 2013: $73,000 / acre;
• seller: GeoSouthern Energy; all cash deal;

Anadarko:

• 430,000 net acres;
• Oklahoma's Canadian, Kingfisher and Blaine counties
• one of the largest positions in the play
• focused on the oil-prone Meramec and the liquids-rich Cana-Woodford shale;
• 80,000 net acres for $2.5 billion, link here, December 7, 2015; $31,250/acre;
• 1,400 risked locations; more than 3,000 unrisked locations;
• seller Felix Energy LLC

Powder River Basin:

• 470,000 net acres
• Turner, Parkman, Teapot, and Niobrara formations;
• 253,000 net acres for $600 million, link here, December 7, 2015; $2,400/acre;

Williston Basin:

• 85,000 net acres
• located entirely on the Fort Berthold Indian Reservation

Part 9

Other links:

• DVN website: https://www.devonenergy.com/
  
• Three strong oil and gas stocks for the summer, 2021; link here:
• APA: smart hedging strategy
• Cheniere Energy: robust LNG demand
• Devon: strong earnings + variable dividends
• Devon's Permian oil output climbs, Anadarko growth eyed as natural gas prices climb, link here, October 30, 2020;
• production guidance raised,
• lowered exploration costs,
• set sights on expanding its hold in the Permian Basin (WPX?)
• from that article: Devon has an opportunity for contingent cash payments from the Barnett assets of up to $260 million based upon future commodity prices, “with upside participation beginning at either a $2.75/Mcf Henry Hub natural gas price or a $50/bbl West Texas Intermediate oil price,” Hager said.look at current prices for WTI and Henry Hub;
• Devon Energy announces fixed-plus-variable dividend for common stockholders, August 3, 2021;
• DVN dividend history;
• Devon Energy gears up for more Niobrara activity in Powder River Basin, link here, February 19, 2020;
• UBS: stocks with yields greater than 2% and seen as "attractive": link here. Of the twenty companies, the energy companies:
• Plains All American Pipeline (#2)
• Energy Transfer (#3) -- DAPL
• XOM (#4)
• Phillips 66 (#5)
• Marathon Petroleum - MPC (#7)
• Energy (sic) -- ETR (#8)
• Dominion Energy (#10) -- a utility
• Sempre Energy (#11) -- a utility
• American Electric Power (#12) -- a utility
  

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here.  

Devon:

• market cap: $18 billion
• share price: $27
• 52-week range: $7 - $32
• P/E: 53
• pays: see above
  

EOG:

• market cap: $41 billion
• share price: $71
• 52-week page: $31 - $88
  
• P/E: 22
• pays: 2.3%

One last comment: for those who were brave enough during the worse of the "downturn" last summer, one could have bought a lot of DVN for $7 / share; it's now trading for 4x that and paying a great dividend.

Disclaimer: in a long note like this there will be typographical and content errors. Consider this an opinion piece, not a news article, or a business article. Facts and opinions are interspersed and it is often difficult to tell the difference.