Devon Energy: Time To Add Exposure On Weakness

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It has been a while since we discussed Devon Energy Corporation (NYSE:DVN), aliases moreover had vulnerability to Devon since having various positions called distant successful 2022. We thought that location mightiness beryllium a trading opportunity around not only Devon but nan full power manufacture erstwhile nan wintertime large wind deed Texas, arsenic everyone would person to woody pinch not only little power prices, but accumulation hits that would much than offset immoderate accumulation gains from caller wells/production. Warnings began to trickle out, but galore ignored them, and now we are seeing what we judge to beryllium overreactions.

We wrote an article focusing connected Pioneer Natural Resources Company (PXD) and their announcement regarding accumulation losses from nan wintertime storm. While that banal has fallen by complete 6% since our article, we fishy that it mightiness trial support astir $200/share, arsenic we deliberation guidance will beryllium announcing a smaller adaptable dividend for shareholders this quarter. Basically, PXD is successful nan aforesaid business that Devon shareholders find themselves in; a awesome company, pinch awesome assets, managing a dividend argumentation that consists of a guidelines dividend and a adaptable constituent during a correction successful power prices. While nan business is beardown and everything looks great, investors are dealing pinch nan disappointment of little wide payouts.

Devon's Dividend

So, nan bully news from nan precocious released quarterly results (Q4 2022) was that nan institution increased nan fixed dividend (the base) by 11% starting pinch nan adjacent dividend successful March. So nan fixed information moves up from $0.18/share per 4th to $0.20/share per quarter. While this whitethorn look low, we position it arsenic bully news because guidance has capable religion successful nan company's finances to perpetrate to paying a quarterly fixed complaint dividend that yields astir 1.50% - which is earlier distributing up to 50% of nan excess free rate travel to shareholders via nan adaptable complaint dividend policy.

While DVN's dividend has risen sharply complete nan past 2 years, we are now starting to spot quarter-over-quarter declines for nan adaptable dividend portion. (Devon Q4 2022 Quarterly Results Presentation)

Importantly, Devon's results were impacted by nan wintertime storm, pinch accumulation for nan 4th being reduced by 2% owed to nan weather. This, coupled pinch falling pricing, led to nan wide little dividend arsenic nan adaptable complaint dividend fell from $1.17/share per 4th to $0.69/share for nan quarter. All-in, nan rate dividend for Q1 2023 is going to beryllium $0.89/share per 4th - down from nan Q4 2022 dividend of $1.35/share.

Devon's Results

While nan marketplace was not excessively keen connected Devon's plans to boost spending successful 2023, we deliberation that nan summation successful accumulation successful Q4 provides a coagulated guidelines to build from and that nan marketplace mightiness beryllium viewing this each wrong. Oil volumes of 316k BOPD came successful astatine a grounds precocious for nan company, and Devon expects that wide accumulation will travel successful astir 635k BOEPD and ramp up into nan 643k to 663k BOEPD accumulation range. From Devon Energy's Q4 2022 Quarterly Results press release:

Devon will spot accumulation summation early successful 2023. (Devon Energy Q4 Quarterly Results Press Release)

It would look from this connection that overmuch of Devon's accumulation increases are going to beryllium realized successful nan first 2 quarters of 2023; and possibly much importantly, nan accumulation maturation will proceed to beryllium heavy skewed towards lipid production. Spending will beryllium heavier than planned successful nan first half of nan twelvemonth "due to nan summation of a impermanent 4th frac unit successful nan Delaware Basin," arsenic Rick Muncrief (Devon's CEO) explained connected nan Q4 convention call to talk nan quarterly results. Spending to adhd lipid accumulation erstwhile prices are still good supra costs is simply a bully move, and will thief nan institution pinch their wide semipermanent accumulation plans.

Clay Gaspar highlighted immoderate cardinal operational items and laid retired nan scheme for 2023 spending. Devon is fundamentally going to run done nan afloat twelvemonth 2023 arsenic they operated successful Q4 2022, connected an activity basis, allocating spending crossed nan portfolio - including nan 2 precocious acquired properties. Devon will tally 25 rigs done nan year, which should consequence successful astir 400 caller wells being placed online during 2023. With 60% of nan superior fund for 2023 being targeted for nan Delaware Basin, Devon will run 16 rigs connected their acreage.

Management noted that nan resistance connected accumulation successful Q1 2023 is owed to a compressor installation successful nan Stateline area being down caused by a fire, which occurred successful precocious January. There are crews moving connected repairing nan installation correct now, but much importantly, nan institution has already secured nan instrumentality basal for repairs. The effect connected accumulation successful Q1 is going to beryllium astir 10,000 BOEPD, nevertheless nan installation and accumulation should beryllium backmost up by mid-March which paves nan measurement for higher accumulation volumes successful Q2.

Looking Forward

Devon executives stated galore times that their privilege is connected nan dividend and returning superior to shareholders. This was besides evident successful nan property merchandise and accompanying descent deck. We thought Jeff Ritenour's, Devon's CFO, prepared remarks connected nan convention telephone were cardinal though, arsenic it seems that Devon mightiness beryllium shifting its sights much towards stock buybacks and little towards indebtedness reduction. The pursuing connection caught our oculus (emphasis added):

"Our beardown investment-grade financial position provides america nan opportunity to return much free rate travel to shareholders and beryllium little fierce connected indebtedness reduction.

Moving forward, we'll look to discontinue indebtedness arsenic it comes due, utilizing our patient rate balance. Our adjacent indebtedness maturity comes owed successful August of this twelvemonth totaling $242 million. We will person further opportunities to pare down indebtedness pinch maturities coming owed successful 2024 and 2025 arsenic well."

There was besides this gem:

"As we caput into 2023, we expect to beryllium progressive buyers of our stock, particularly if we spot trading weakness comparative to our peers."

With $700 cardinal still authorized connected a stock buyback programme that expires connected May 4, 2023 guidance will beryllium spending heavy from their $1.5 cardinal rate stockpile connected nan equilibrium expanse to bargain backmost shares. We fishy that nan Board of Directors will either summation and widen nan existent program, aliases denote a caller programme if guidance does exhaust it earlier May 2023.

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Our Trade

As we person done before, we want to waste and acquisition Devon Energy Corporation utilizing nan options market. There is simply a batch of sound surrounding nan Federal Reserve, liking rates and ostentation correct now, truthful alternatively than buying outright present we judge trading immoderate puts is simply a spot much prudent. We for illustration nan worth astatine these levels, particularly pinch Devon's debased costs production, but we deliberation that nan marketplace whitethorn beryllium successful for different astonishment and Devon mightiness trial its lows. With guidance looking to opportunistically acquisition shares via nan repurchase plan, it does look that nan debased $50s is simply a bully spot to found a mini position outright, truthful we cannot reason pinch that.

However, we for illustration nan Devon March 17, 2023 Puts pinch a $53/share onslaught price. Trading these coming tin make a $2.01/share action premium, which aft fees/commission leaves conscionable complete $200 per contract. Generating a 3.77% output for 23 days is simply a beautiful coagulated trade, and if you do person to return transportation of nan shares, your costs ground would beryllium conscionable nether $51/share.

Final Thoughts

We for illustration this trade, arsenic we consciousness that nan worst whitethorn beryllium complete connected this latest selloff. It allows america to hedge ourselves somewhat by lowering our imaginable costs ground successful nan look of what mightiness beryllium a much fierce Federal Reserve, aliases pouch a decent return complete 3 weeks. Getting paid now to woody pinch nan aforesaid problems that you would beryllium facing if you had purchased nan Devon Energy Corporation shares outright seems logical. With guidance aggressively repurchasing shares (and nan imaginable for an further stock buyback programme announcement), we deliberation that nan risk/reward astatine these levels is yet opening to look charismatic for Devon Energy Corporation.

Follow america connected Twitter here: @theinvestar Previously a Trader/Portfolio Manager for a Treasury Office managing anyplace from $10-20 cardinal (treasury assets, status benefits, endowment related funds), presently portion of a squad that oversees an extracurricular finance head managing almost $30 billion. Previously nan laminitis of theinvestar.com, LLC. theinvestar.com, LLC was a starring news supplier connected nan potash and uranium mining industries supplying information services, commentary, interviews, finance news, newsletters and quarterly manufacture publications.