Devon isn’t alone in seeing its shares soar. Energy stocks have rallied this year as oil prices have climbed with loosening Covid-19 restrictions creating demand and OPEC+ keeping output restrained.
Exploration and production companies historically have responded to swings in crude by increasing activity as prices went up and trimming back as they went down, Wells Fargo analyst Nitin Kumar said. But Devon’s fixed-plus-variable model gives it a balance of consistency and flexibility.
“They allowed that excess windfall from the commodity price to flow to the shareholders,” Kumar said. Instead of the cash flow from higher commodity prices being used to chase production growth, which in turn adds supply to the market that could weigh on the commodity prices, it goes to creating value for shareholders.
Wall Street has taken to the company, with 27 out of 32 analysts covering the stock rating it a “buy,” according to data compiled by Bloomberg. Their average 12-month price target implies about a 15% premium over Wednesday’s closing price.
Devon shares have staged a roaring rebound to 2018 levels
“It’s pretty easy to figure out what we think is going to be coming straight back to the shareholders,” Barclays’s Wai said. “So we’re not surprised that it has performed so well, given their transparency on returning the cash and the quality of their inventory.”
The company has authorized a billion-dollar stock buyback program for next year, and its latest dividend announcement was $0.84 per share for the third quarter. Devon will evaluate the fixed element of the dividend in the first quarter of each year to determine whether to change it, Muncrief said.
“We don’t want to be a one-year wonder,” Muncrief said. “We want to show people that we’re a great long term investment.”
This article was provided by Bloomberg News.