Is Devon Energy Dividend Sustainable?

Devon Energy has been offering constant rises in its dividend payouts throughout its history. In recent years it has sustained this trend at a rate of $0.02 in dividends paid per share every year. It has maintained a clear dividend policy and has thus never cut back the amounts distributed to its shareholders and in the worst cases just froze the increases until subsequent years.

The current stock price is at the same level as in 2013 at around $67 down from just short of $80 in June 2014. It offers however better dividends distribution at $0.94 per share or 9.30% higher. Its price is rising and trending with oil & gas prices and has recovered from its recent lows. Technically the price is above the last two highs it reached during the last two quarters and seems to be developing towards a $76 target.

The company’s finances have recently been negatively impacted by the drastic falls in barrel prices and are bound to recover once the market lifts upward. Currently at $60 crude prices fell from $96 in July 2014. However, oil prices have an upside potential thanks to the recovering economy.

The US and European economies are strengthening albeit softly with GDP growth figures for 2014 at +2.4% for the US and +1.6% for Germany. These figures are forecast higher still in 2015 for all major economies . This will help fuel emerging economies growth leading to higher demand for oil & gas on a global scale. This will in turn support oil price levels beyond where they currently lay.

On a company level, assets have been growing year on year thanks to continuing investments which are adequately financed through long-term debt. Total debt levels are down compared to previous years and have tilted in favor of longer term debt. The latter’s proportion is equivalent to what is seen on its peers balance sheets.

The asset utilization rate has been growing constantly signifying a more efficient use of the company’s assets in producing revenue. The firm’s cash flows are leaning into positive territory for 2015 as shown by its first quarter results helping reinforce its cash position for future investments and/or acquisitions.

Moreover Devon’s accounts currently hold nearly $1.9 billion in cash while it handed out $386 million in dividends in 2014. It will distribute a little more than $320 million this year’s remaining three quarters in addition to the $99 million it has already issued.

The company has been propping up its oil production in an almost linear manner for the last five year from 111,000 barrels a day in 2010 to 214,000 in 2014 . In the latter year, it has acquired new fields equivalent to 82,000 acres in the Eagle Ford formation in South Texas one the most actively drilled regions in the US.

Since its exploration & production business is mainly located in the United States and Canada, the company is relatively immune to the risks inherent to working in unstable zones such as Libya or Syria. Its investments are safe and its production shielded from sudden cuts due to halting operations.

Thanks to its growing production and its reduced exposition to political risk, Devon can continue growing its market share and better prepare for a recovery in oil prices and enhance its profitability in the process. Meanwhile it will be able to compete with other oil companies in the US and abroad which are vying to benefit from this low prices environment to gain market shares from firms with collapsing production.

The combined effects of stronger commodities markets, larger market share, a better cash position and broader production and investments will help sustain the company’s finances and thus its policy in distributing more dividends.