Investing Club: We're encouraged by Devon's solid earnings, shareholder return and cash flow goals

Published Tue, Feb 15 20228:27 PM EST

Investing Club holding Devon Energy (DVN) reported better-than-expected fiscal fourth-quarter results after the closing bell Tuesday. On the topline, total revenue of $4.273 billion outpaced expectations of $3.618 billion. On the bottom line, adjusted diluted earnings of $1.39 per share was better than the $1.23 per share the street was looking for. Note that management will host their earnings call on Wednesday at 11 a.m. ET, as a result, we will therefore not have much in terms of management commentary in this alert and will follow up with any important information after the call. Bottom line Devon reported solid results that point to a continuation of strong shareholder returns. Despite a miss on realized prices — due in large part to heavy hedging activity — and below consensus production guidance, the prioritization of cash flows combined with a heightened sense of investment discipline is translating into a strengthening balance sheet and a market leading dividend yield, which is further enhanced by aggressive share repurchase activity. Cash flow Taking a look at cash flows, operating cash flow of $1.6 billion (+173% year over year) was a bit shy versus the $1.7 billion expected — and after accounting for all capital requirements, free cash flow of $1.13 billion came up short versus expectations of $1.19 billion. On a full-year 2021 basis, Devon generated $4.9 billion of operating cash flow and $2.9 billion in free cash flow, the latter being the highest total in Devon's 50-year history. Capital allocation While cash flow results may have been short of expectations, they were strong enough to allow Devon to declare a record high fixed-plus-variable dividend payout of $1 per share payable on March 31, 2022 to shareholders of record at the close of business on March 14, 2022. Based on Tuesday's closing price of $51.42, this annualizes to a 7.77% yield. The fixed portion of the dividend was bumped up by $0.05 (or 45%) per share to $0.16 per share. On top of the strong dividend payout, Devon repurchased 14 million shares in the fourth quarter at an average price of $42 per share, retuning a total of $589 million to shareholders. Even better, thanks to the significant progress Devon is making, the board approved a 60% expansion of the share repurchase authorization to $1.6 billion, representing roughly 4.5% of Devon's fully diluted market cap of roughly $35.49 billion, as of Tuesday's close. Capital discipline At a higher level, management continues to emphasize capital discipline with a focus on moderating oil growth targets ("up to 5% annually"), margin expansion via operational scale and cost efficiencies and strong, as well as a returns driven strategy that prioritizes free cash flow generation. This focus on capital efficiency is translating into a strong, investment-grade balance sheet, with the company retiring a total a $1.2 billion of debt in 2021 and ending the year with $2.3 billion in cash on hand. Looking ahead, the team plans to retire another $1 billion of low-premium debt in 2022 and 2023, and achieve a net debt-to-EBITDAX ratio of less than 0.5x by year-end 2022 — down from 0.8x exiting 2021. (EBITDAX stands for earnings before interest, taxes, depreciation), amortization, and exploration expense.) Guidance Looking ahead, the team will continue to prioritize free cash flow over volume growth. For the first quarter, adjusting for downtime, management is targeting 570 *MBoe/d, a miss versus the 592 MBoe/d consensus For fiscal year 2022, the team is targeting (1) an over 70% increase free cash flow, well ahead of the roughly 45% the street was targeting coming into the print; (2) total production of 570 to 600 MBoe/d, bracketing expectations, though a bit below the 592.5 MBoe/d expected coming into the print, at the midpoint; (3) a $30 West Texas Intermediate crude breakeven and $2.50 breakeven on natural gas at Henry Hub; and (4) upstream capital investment of $1.9 billion to $2.2 billion. Regarding the free cash flow target, this growth assumes $85 WTI, $4 Henry Hub & Natural Gas Liquids (NGL) realizations at 40% of WTI and a mid-single digit current tax rate. Based on a roughly $35.49 billion market cap (as noted earlier), this amounts to a free cash flow yield of 14%. The team also provided some sensitivity analysis, indicating that should WTI average $75 the yield will be closer to 12% and should it average $95 we would be looking at something closer to a 17% yield. (WTI for March delivery on Tuesday fell nearly 3.6% to settle in New York at $92.07 per barrel, breaking a four-session winning streak with its worst daily performance in 2022.) Quarterly production and pricing Taking a look at production, total oil equivalent production came in at 611 MBoe/d, 3% above management's prior guidance and better than expectations of 596 MBoe/d. The make up of this production was as follows: Oil: (**MBbls/d): 300 vs. 297 expected NGL: (MBbls/d): 154 vs. 143.3 expected Gas: (***MMcf/d): 943 vs. 932.4 expected As for pricing (including cash settlements, think hedging activity), on a total oil equivalent basis, Devon realized a price of $44.34 per barrel of oil equivalent (Boe), missing expectations of $47.8 per Boe. The makeup of this price realization was as follows: Oil: $62.22 vs. $63 expected NGLs: $34.82 vs. $34.60 expected Gas: $$3.26 vs. $4.00 expected That said, we note that much of the result is due to greater than anticipated hedging activity and thanks to the company's improving financial strength management anticipates a roughly 20% reduction in volumes hedged in 2022. Before accounting for the hedges, on a total oil equivalent basis, Devon realized a price of $53.12 per Boe, still below expectations of $53.60 but much closer to the mark. The breakdown excluding hedging was as follows: Oil: $75.36 vs. $74.60 expected NGLs: $35.36 vs. $34.40 expected Gas: $4.68 vs. $5 expected Definitions * MBoe/d: thousand barrels of crude oil equivalent **MBbls/d: one thousand standard barrels of 42 U.S. gallons per day ***MMcf/d: one million cubic feet per day (Jim Cramer's Charitable Trust is long DVN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Nick Oxford | Reuters

Investing Club holding Devon Energy (DVN) reported better-than-expected fiscal fourth-quarter results after the closing bell Tuesday.