Dividends -- Devon -- June 22, 2022

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Devon Energy, link to Motley Fool;

Devon Energy (DVN 4.38%) is paying out a gusher of dividends these days due to its oil-fueled dividend framework. The oil producer pays a growing fixed-base quarterly dividend that it complements with a variable payout based on its cash flow.

With oil prices surging, both dividend payments have soared this year. Its most recent payment pushed its annualized dividend yield to around 6.5%, much higher than the S&P 500's 1.4% yield.

Devon recently added more fuel for the dividend by agreeing to purchase additional oil-producing land in the Williston Basin. The highly accretive deal will enable Devon to immediately boost its fixed quarterly dividend. It should also provide the cash to pay even higher variable dividends in the future.

Devon Energy is acquiring the leasehold interest and related assets of RimRock Oil and Gas in the Williston Basin of North Dakota for $865 million. The bolt-on deal features 38,000 net acres of producing and drillable land largely adjacent to Devon's existing position in the region. The acquisition will significantly increase Devon's scale in the area:

Overall, RimRock will grow Devon's production in the region by more than 30%. Meanwhile, there's enough undeveloped land to drill at least 100 highly economical wells in the future.

Devon is getting these assets for an unbelievable price. It's only paying about 2.2 times its estimated cash flow. Furthermore, its investment will earn an estimated free-cash-flow yield of greater than 25% at the current projected oil and gas prices over the next year. Because of that, it's immediately accretive to all the company's key per-share metrics, including earnings, cash flow, and free cash flow. Overall, it will grow its earnings and free cash flow by 3% to 5% per share in the first year.

And even though Devon is paying $865 million in cash, the oil company will maintain a top-tier balance sheet following the deal. Because of how highly accretive it is, its leverage metrics will remain largely unchanged, preserving one of the best balance sheets in the oil patch.