Devon Energy Sets Its Sights on Share Buybacks Amid Undervalued Oil Stocks
Devon Energy, a leading figure in the oil industry, has recently revised its approach to capital returns, switching gears from its prior focus on dispensing substantial dividends to shareholders towards an enhanced emphasis on buying back its shares in 2024. This adjustment is fueled by the company’s firm belief that its stock, alongside the broader oil sector, is significantly undervalued at present.
An Expense-Cutting Drive Fuels Future Efficiency
In a recent earnings call for the fourth quarter, Devon Energy’s CEO, Rick Muncrief, shed light on the company’s refined strategy for capital returns. Anticipating a leap in operational efficiency in the coming year, Muncrief outlined that by capitalizing on lower oilfield service costs and honing its operations in the Delaware Basin, Devon is poised to reduce its capital expenses by 10%. This strategic maneuver is projected to escalate the company’s free cash flow by 20% to an impressive $3.2 billion, presupposing an average oil price of about $80 per barrel.
The company has charted a course to allocate 70% of this burgeoning cash flow to its shareholders, while the remainder will be used to bolster its robust balance sheet. A pivotal component of this shareholder return is a 10% increase in its base quarterly dividend forecasted for 2024, with additional excess cash being allocated flexibly.
“With our flexible cash return framework, we will judiciously allocate our free cash flow toward the best opportunity, whether that be buybacks or dividends,” Muncrief explained. “Given the energy sector’s heavy discounting in the equity market, prioritizing buybacks over the variable dividend to capture Devon’s incredible value at these historically low valuations is an easy decision.”
The Bargain Bin: Energy Sector’s Underappreciation
Devon Energy’s strategy shines a light on a broader issue within the market— the undervaluation of the entire energy sector. Despite the sector’s significant earnings contribution, it occupies less than 4% of the S&P 500’s composition. Muncrief attributes this imbalance to inflated valuations in the tech industry and widespread misconceptions regarding future hydrocarbon demand.
Highlighting a foresight that global energy demand is expected to rise by 50% by 2050, Muncrief underlines the indispensable role of oil and gas. He counters the notion of ‘peak oil demand’ being near, emphasizing the industry’s critical contribution to future energy growth.
This expected increase in demand implies that companies like Devon Energy are not only positioned to boost their production and free cash flow but also magnify shareholder returns through significant equity upside. Muncrief’s confidence in the sector’s prospects is evident, “why we are putting our money to work actively repurchasing shares.”
Strategic Shift Towards Value Creation
Devon Energy’s pivot towards share buybacks is driven by a clear rationale— the current stock market underestimation of the energy sector, exacerbated by an overvaluation of tech stocks. This shift is seen as a strategic move to leverage the present low stock prices for future value creation.
The company’s initiative to repurchase shares underscores a proactive approach to enhancing shareholder value in the long term. With the energy sector poised for growth amidst increasing global demand, Devon Energy’s focus on capitalizing on today’s underpricing could yield substantial returns for its investors.
In an era where investment strategies are continuously evolving, Devon Energy’s prioritization of share buybacks over variable dividends presents a compelling case for the undervalued potential within the energy sector. As the market dynamics gradually realign with the intrinsic value of oil stocks, initiatives like these could pave the way for notable investor gains.
