Devon Energy just reported a strong operating quarter, but don’t forget that oil and natural gas prices rule the day with this dividend stock.
Devon Energy (DVN 0.22%) is a large, U.S. based oil and natural gas producer. It has a strong and growing business and a generous dividend yield. There are good reasons to buy and hold the stock. But there’s also a very good reason why many investors would want to avoid it.
Here’s a quick look at the buy, sell, hold decision for Devon Energy.
Buy Devon Energy
In the second quarter of 2023 Devon Energy agreed to buy the Williston Basin business of Grayson Mill Energy. The deal is valued at $5 billion, with $3.15 billion of that consideration being paid in cash and the rest in stock.
Devon Energy expects the deal to be immediately accretive to earnings as it materially expands the company’s business in the basin and allows for up to $50 million in cost savings. The big takeaway, however, is that Devon Energy is a growing energy business.
This deal will help to solidify the company’s production, which includes around a decade worth of drilling opportunities throughout its portfolio. Even without that acquisition, however, Devon Energy appears to be hitting on all cylinders today from an operating perspective. Second quarter 2024 production came in ahead of guidance and reached an all-time high, leading the company to increase its full-year production outlook. After the acquisition is complete, Devon Energy will provide an update to its guidance to include the impact of the new assets.
If you are looking for a large onshore U.S. oil and gas company, Devon Energy isn’t a bad choice. However, there’s one very important factor to consider here that management has no control over: Energy prices.
Sell Devon Energy
The products that Devon Energy sells, oil and natural gas, are commodities. Although these energy sources are vital, they are prone to dramatic, and often rapid, price swings. Given that Devon Energy’s top and bottom lines are driven by the price of oil and natural gas, investors that buy it need to understand that its financial results can be highly volatile.
No matter how well Devon executes on the business front, there is no escaping the impact of commodity prices on its business. A more diversified company, like Chevron (CVX 0.82%), that has exposure to the entire entire energy sector (upstream, midstream, and downstream) will probably be a more appropriate option for conservative investors.
DVN Dividend Per Share (Quarterly) data by YCharts
Energy price swings are exaggerated at Devon by the fact that Devon’s dividend is tied to its financial performance, with a base payment that is supplemented by a variable payment.
Although you’ll find the dividend yield listed at a generous 4.5% on major online quote services, you just can’t count on that figure. The dividend payment literally changes every quarter. In fact, as the chart above shows, the range over the past three years is between $0.35 per share per quarter on the low end and $1.55 on the high end.
If you can’t handle an income swing like that, perhaps because you are trying to live off of the dividends your portfolio throws off, you shouldn’t own Devon Energy.
Hold Devon Energy
There’s a caveat here, however, that might make Devon Energy a great stock to hold for the long term. The chart below overlays the price of West Texas Intermediate crude oil, a key U.S. energy benchmark, on the dividend. Notice that as oil prices rose so did the dividend. That shouldn’t be a shock, given that the dividend is specifically designed to do just that.
DVN Dividend Per Share (Quarterly) data by YCharts
But think about the real world impact of the change in energy prices for a quick second. Rising oil and natural gas prices mean higher costs for things like heating and gasoline. The increasing dividend would have helped to offset the impact, offering something of a hedge to your real world energy costs. In this way, owning Devon could be a good option for even conservative income investors.
However, you need to go in knowing that this is the reason you own the stock or you will probably end up disappointed. Indeed, when oil prices come back down from peak levels, as they have always done historically, the dividend will get cut.
Devon is a complex investment
Because of the variable dividend policy, Devon is not a particularly simple energy stock to get your head around. But, if you appreciate the benefit of the dividend policy, this expanding oil and natural gas stock could be worth owning for the long term.
