Oil is having a good year. Devon Energy Corp. is having a much better one.
The Oklahoma oil and gas exploration and production company is the best performing stock in the S&P 500 Index this year. Its 177% surge handily beat the 48% gain in West Texas Intermediate crude futures, not to mention the 25% rise in the S&P 500 and the 50% jump in the S&P 500 Energy sector, which is the top group in the equity benchmark for 2021 after being the worst last year.
Obviously, higher oil prices helped drive energy companies’ gains during the skittish global rebound from the Covid-19 pandemic. But what sets Devon apart from its peers, according to analysts, is a determination to return free cash flow to investors through a clear, fixed-plus-variable dividend framework for its capital returns.
“What we can’t control is commodity prices,” CEO Rick Muncrief said in an interview. “So we did have some tailwinds there, which actually gave us some uplift on the amount of free cash flow that you’re generating, which drives those really big dividend payments.”
It’s a strategy that clearly appeals to Wall Street.
“Devon has been a leader in the new paradigm for E&P, which is now a low-growth, free cash flow paradigm going forward,” Barclays analyst Jeanine Wai said.
The transformation started on Sept. 28, 2020, when Devon announced a merger with WPX Energy Inc., where Muncrief was running the show. Part of the plan for the combined company was to start a fixed-plus-variable dividend. Prior to that, Devon was down 66% on the year and was one of the S&P 500’s worst performers.
“It was primarily supply-and-demand concerns” that weighed on the stock, Muncrief said. “We were in the throes of the pandemic.”
Since then, the shares are up more than 358% and hitting levels last seen in 2018. The CEO thinks the company’s performance this year represents a rebound from the pandemic’s trading trough as well as the beginning of a new trajectory.
“With the discipline I’m seeing in the industry, I think we’re going to see multiples expand, which will help us,” Muncrief said.