Energy Prospectus

I am think of moving DVN to our High Yield Income Portfolio because of its fixed-plus-variable dividend of $0.49 per share based on second-quarter 2021 results for annual yield of 6.7%. Based on my forecast model, I expect them to keep raising their quarterly dividend through at least 2022.
BofA Equity Research's take on DVN
Devon Energy (DVN)
Clay Gaspar, Executive Vice President & COO
Joining us from Devon Energy was COO Clay Gaspar. We continue to view DVN as one
of the most transparent investment cases of its peer group, providing every parameter
to define the outlook and sustainability of its free cash flow. From here, the incentive for
investors could not be simpler with a free cash yield not some nebulous benchmark, but
rather the baseline to determine distributions. At current levels, we see DVN as
attractive given a possible market leading yield that pays to wait in 2H. Highlights from
our recent meeting with management are summarized as follows.
• Potential M&A. Given the running room of the current portfolio, potential M&A has
a relatively high hurdle rate. One of the biggest impediments for the industry as far
as mergers is commodity price volatility which makes it more challenging to come
up with an agreement on valuation.
• Synergies with WPX Energy. With over seven months in from the merger with
WPX, DVN continues to observe a sense of excitement from its employees over new
ideas being generated. We perceive this as implying future risk of incremental
synergies going forward.
• Inventory. DVN has visibility on probably a decade of inventory to maintain its free
cash flow given the derisking of its current inventory in Delaware. However, it
believes it can potentially extend this to 15 years as it assesses other horizons over
time.
• Buybacks. DVN continues to see a both fixed and viable dividend framework as
important to investors. With that said, it is looking at potential buybacks as it
believes that all three methods of returning capital to shareholders are important
given volatility in commodity prices.
• Hedging. With its net debt to EBITDA metrics approaching 1x or less, it continues
to see the need for less hedging going forward. In our view, this may provide
investors more opportunity to participate in possibly higher commodity prices going
forward, particularly given the company’s fixed plus variable dividend policy.

Dan, would Devon continue to be in the Sweet 16 also?
If not, what companies are replacement candidates?

Kevin

I haven't decided on a replacement for Devon yet, so I may wait until late September to move it. I will be taking a hard look at all of the companies in our Small-Cap Growth Portfolio next month. I have a high level of confidence in my forecast models for all of the small-caps, but some of them are quite small. Just based on market-cap, MGY and MTDR are the largest. Both have market-caps well over $3 Billion.

If I put both of them in the Sweet 16, ESTE would move back to the Small-Cap Growth Portfolio just based on market-cap. There is nothing wrong with ESTE and I love the management team and their "growth by acquisitions" business plan.

Dvn's giving a div does not imply it is no longer a growth stock, so why not keep it there?

There is definitely an argument for that. Devon is a very high quality company. I actually interviewed with Devon when I left Hess in 2001.

To be clear, I am bullish on all of the companies in our three model portfolios. They all have upside and some of the small-caps have more potential upside than the Sweet 16. What I'd like to do is get more C-Corps into the High Yield Income Portfolio because there seems to be a lack of interest in the MLPs. That is what gave me the idea of moving Devon in the first place.