Devon Energy (DVN) Q2 Results - August 4

[dan_s]

Devon Energy Corp. (NYSE: DVN) reported financial and operational results for the second-quarter 2021.

KEY FINANCIAL AND OPERATIONAL HIGHLIGHTS
• Fixed-plus-variable dividend increased by 44 percent to $0.49 per share
• Investment-grade financial strength enhanced with redemption of $1.2 billion of debt year-to-date
• Operating cash flow increased 85 percent from the prior quarter to $1.1 billion < Compares to my forecast of $1.086 Billion.
• Free cash flow generation accelerated to $589 million, a 6-fold increase from the prior quarter
• Oil production exceeded midpoint guidance, averaging 291,000 barrels per day in the second quarter < Compares to my forecast of 283,000 BOPD.
• Delaware Basin efficiency gains drove capital expenditures 9 percent below guidance
• Merger synergies improved corporate cost structure by 27 percent year over year

CEO PERSPECTIVE
“2021 is shaping up to be an excellent year for Devon that can best be defined as one of comprehensive execution across all elements
of our strategy, resulting in expanded margins, growth in free cash flow and the return of significant value to our shareholders
through higher dividends and the reduction of debt,” said Rick Muncrief, president and CEO.
“With our business building momentum and generating increasing amounts of free cash flow, a clear differentiator for Devon is the
ability to accelerate cash returns through our fixed-plus-variable dividend framework,” said Muncrief. “The power of this uniquely
designed dividend strategy was demonstrated by our announcement to increase the dividend by 44 percent this quarter.”
“As I look to the second half of the year, the investment proposition for Devon only continues to strengthen,” Muncrief added. “With
our disciplined capital allocation framework, we are positioned to have the highest forward dividend yield in the entire S&P 500 index
that is accompanied by a strong balance sheet projected to have a leverage ratio of less than 1-turn by year end.”

Stifel's take:

Devon Energy Corporation (DVN, $26.21, Buy; Target $45.00)
Announces a strong quarter and best-in-class fixed-plus-variable dividend payout - Derrick Whitfield
We view this release as positive. The positives include: i) a total equivalent and oil production beat (2.6% and 0.2% above) on lower-than-expected capex (8.6% below), ii) better-than-expected Q321 total equivalent and oil production guidance (3.0% and 0.2% above), iii) the fixed-plus-variable dividend of $0.49/share represents an annualized dividend yield of ~7.5%, and iv) continued strong well performance out of the Delaware and Williston Basins. The negatives include: i) higher-than-expected Q321 capex guidance (5.5% above) and ii) lower-than-expected Q421 implied oil production guidance (3.0% below). We caution investors to note Devon reiterated full-year 2021 capex guidance. Net-net, Devon delivered a strong quarter and offers investors a compelling return of capital program with a 7.5% annualized dividend yield, which management believes can exceed 10% based on 2H21 free cash flow projections.

[dan_s]

I have updated my forecast/valuation model for Devon and posted it to the EPG website.
> My current valuation stays at $48.00, but a reasonable 12-month price target is $60 because when Devon's "Bad Hedges" expire at year-end their operating cash flow and dividends are going to be a lot higher in 2022.
> Based on their $0.49 Q2 dividend, the annualize yield is 7.6% today.
> Q2 revenues were hurt by a negative natural gas price in the Williston Basin.
> Q2 was the first full quarter since Devon's merger with WPX Energy. I now have a lot more confidence in my 2H 2021 and 2022 forecasts.
> Assuming realized oil and ngas prices of $65 and $3.00 in 2022, Devon should generate $6.5 Billion ($9.65/share) of operating cash flow in 2022.

DVN is trading for $25.64 at the time of this post, so it is a potential double for us by this time next year.

The Wall Street Gang should love Devon's variable dividend policy. Not today, but it takes time to sink in.