Investing Club: After Devon Energy's post-earnings call, we raised our price target on the stock

Published Wed, Feb 16 20223:35 PM ESTUpdated Wed, Feb 16 20224:02 PM EST

Following up Tuesday's after-the-bell analysis of Devon Energy 's (DVN) quarter, we want to provide Club members with some additional commentary from the post-earnings conference call. Given the quarterly solid release , strong outlook, continued investment discipline, reduced hedging activity going forward, and belief that investors will continue to find Devon's cash flow focus and cash return framework particularly attractive in today's yield starved world, we're raising our stock price target to $60, representing roughly 11x fiscal 2022 earnings estimates of $5.55 per share. Capital returns Kicking off the call — held Wednesday, the morning after earnings — management highlighted Devon's industry leading cash return business model and called out $600 million annual cash flow improvement, resulting from synergies captured following the company's merger of equals with WPX Energy in 2020. With a West Texas Intermediate crude breakeven of roughly $30 per barrel, the team believes they're in a position to deliver free cash flow growth in excess of 70%. They reiterated that the top priority of free cash flow is to fund the fixed-plus-variable dividend. While the $1.3 billion in dividends paid out in 2021 was double the level paid in 2020, they expect the payout to "essentially double" this year — confidence expressed via the 45% increase in the fixed portion of the dividend (which management believes can increase further over time). This is all of course in addition to the 60% increase of the company's buyback authorization to $1.6 billion. Navigating the cycle Regarding the cyclicality of the oil business, management commented that they have a good sense of where they are in the cycle and are working closely with their service partner. As a result, they believe they have a strong grasp on the current environment, view it as "predictable and reliable," and are able to "telegraph to [their] service companies, Midstream Partners and other key stakeholders, to expect more of the same" in 2022 compared to 2021. Delaware Basin Regarding operating regions, the team highlighted the Delaware Basin, calling it "the most capital efficient resource in North America," adding the team realized a 34% increase in production compared to the first quarter of 2021. Furthermore, proven reserves – the amount of resources management reasonably believes they can extract from the ground – in the oil field were up 18% exiting 2021, with the team commenting that "these reserve additions replaced more than 200% of what we produce during the year." Put another way, there's a heck of a lot of natural resources that remain to be harvested in the Delaware Basin and therefore, so long as prices hold up, a heck of a lot of cash flow for the team to return to shareholders. Hedging As we highlighted in our analysis Tuesday night of Devon's better--than-expected earnings and revenue in its fourth quarter, management appears to have over hedged a bit, causing realized prices to come in below expectations. That said, hedging is crucial with management commenting: "What really dilutes our returns is when we have to yank around our operating activity from month to month or quarter to quarter." Hedging provides a margin of safety that prevents the team from having to alter operations based on price fluctuations. Of course, the elevated prices do themselves also provide a margin safety, especially considering Devon's incredibly low breakeven level. Therefore, the team called out that going forward, hedging activity will likely trend around the 30% level, much lower than the 50% or greater level we have seen in the past. This should help the team realize higher prices and enhance cash flows. Environmental, social and governance Believe it or not, despite being a fossil fuel producer, Devon does have ESG targets and took some time to speak about them on the call. Before getting into the actual targets, it's worth noting this is a management team that's putting their money where their mouths are, literally, by directly tying the progress made on these initiatives to annual compensation, and dedicating a board committee to engage in goal setting and reporting. While 2021 figures have not yet been finalized, the team reduced methane emissions and flaring by 47% and 33%, respectively, in 2020, and they expect "this positive rate of change to continue." To achieve these targets, management is and will continue to leverage technological advancements to enhance facility designs and retrofit older facilities. Not only will these investments aid in achieving ESG targets, but are also expected improve overall operations (think, improve efficiency). Longer-term, the team is targeting the following: Net zero greenhouse gas (GHG) emissions for Scope 1 and Scope 2 by 2050 50% reduction in GHG emissions intensity by 2030 65% reduction in methane emissions intensity by 2030 0.5% or lower flaring intensity of gross natural gas produced by 2025 Entirely eliminate routine flaring as defined by the World Bank by 2030 Closing out the call's prepared remarks, Devon CEO Rick Muncrief said: "Now as we shift our focus to the upcoming year, I want to be clear that there is no change to our cash return playbook. It will be more of the same. We will be relentlessly focused on delivering high returns on capital employed margin expansion, accelerating free cash flow growth, and returning excess cash to shareholders." (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.

Pipes carry water, steam and oil at Devon Energy Corp.'s 35,000 barrel per day Jackfish Projects plant, where Steam Assisted Gravity Drainage (SAGD) is used to extract bitumen from oil sands, near Conklin, Alberta, Canada.

Jimmy Jeong | Bloomberg | Getty Images

Following up Tuesday's after-the-bell analysis of Devon Energy's (DVN) quarter, we want to provide Club members with some additional commentary from the post-earnings conference call.