A Citi analyst recently upgraded his price target on high-yield energy stock Devon Energy (NYSE: DVN) from $52 to $55, signaling a potential 13.6% upside. Coupled with the current 5% dividend yield, this presents a promising opportunity for investors. Here’s a look at what makes Devon Energy such an attractive stock for Wall Street and retail investors.
Citi’s upgrade
The upgrade is interesting because it highlights the improvements in Devon Energy’s assets, notably its natural gas assets. This is often overlooked when investors assess the stock. It shouldn’t be because Devon has sizable gas reserves, and the collapse in the price of gas is a big reason for the decline in the company’s dividend in 2023.
Devon Energy’s reserves
The company has a lot of proved developed and undeveloped reserves in gas and natural gas liquids.
Resource
Proved developed and undeveloped reserves at YE 2023
Proved developed and undeveloped reserves (in billions of barrels of oil equivalent*, MMBoe)
Oil
786 million barrels
786 MMBoe
Gas
3,182 billion cubic feet
530 MMboe
Natural Gas Liquid (MMBbls)
500 million barrels
500 MMboe
Data source: Devon Energy presentations. *Oil equivalent converts all resources to an equivalent measure based on energy output. 6 thousand cubic feet of natural gas = 1 barrel of oil
Why Devon Energy’s dividend declined in 2023
The chart below demonstrates the significant decline in the price of gas since the start of 2022 (down more than 50% over the period, while the price of oil is up double digits over the same period). The decline played a role in the reduction of Devon Energy’s variable dividend. For reference, the company pays a quarterly fixed dividend of $0.22 a share and a variable dividend from the remaining free cash flow (FCF) after the fixed dividend has been paid and share buybacks have occurred.
DVN Dividend Per Share (Quarterly) Chart
The chart below shows how the decline in FCF per share led to a decline in the dividend. I’ve also included Devon’s outstanding shares to demonstrate that management’s buybacks have resulted in a decline in the share count, which is…
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