The dividend of this oil share increases with the rise in oil prices

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Oil stock dividends have been almost as volatile as oil prices in recent years. Many oil producers cut their payments following the fall in crude prices in 2014 and 2020. While some companies gave them a boost when oil rebounded between these downturns, several had to cut them again during the downturn. subsequent sale.

Who has driven Devon Energy (NYSE: DVN) take a new approach by launching the industry’s first fixed and variable dividend framework. It features a reasonable base payment that Devon can support at lower prices and additional cash payments when crude prices rebound. The company recently declared its first variable dividend, which has soared on the back of rising oil prices.

Image source: Getty Images.

A solid foundation with a significant advantage

Devon has paid a basic quarterly dividend of $ 0.11 per share, which it can sustain at less than $ 40 a barrel of oil. It’s an attractive payout, with a return of around 2.1% over the current share price, which is S&P 500average of dividend yield 1.5%.

However, the company wanted to supplement that payout by returning additional cash to shareholders when it generated excess funds during a possible oil market rebound. Traditionally, Devon and his peers have used share buybacks to return cash to investors. However, this did not create shareholder value as the industry often bought back stocks when they were high, only to see them fall when oil prices fell.

This led him to put in place a new dividend strategy to return part of his excess cash to investors via an additional variable dividend that he could pay quarterly depending on his balance sheet and the state of the oil market. The framework would allow Devon to pay up to 50% of its excess cash after funding its capital projects and a quarterly payment on a fixed basis.

A row of oil pumps with money in the background.

Image source: Getty Images.

A dazzling start

Devon recently declared its first variable dividend, setting it at $ 0.19 per share. This equates to roughly 48% of its excess free cash flow during the fourth quarter of 2020. Overall, the company distributes an additional $ 128 million in cash to shareholders through its first variable dividend, which is in addition to the base dividend of $ 42 million. expenses for this period.

This first payment is just the start of what Devon looks set to hand out this year. At $ 50 worth of oil, Devon estimates it can produce $ 3 billion in operating cash flow. However, the company only plans to spend $ 1.6 billion to $ 1.8 billion on capital projects to keep production stable this year. That means it could generate up to $ 1.4 billion in free cash flow this year at $ 50 worth of oil. However, with crude oil currently around $ 60 a barrel, Devon could produce even more excess liquidity in 2021.

The fact that Devon is not using this money much to fuel the likelihood of even larger payments in the coming quarters. Despite rising oil prices, the company is unlikely to increase its capital budget and speed up its drilling program as the oil market does not need additional crude. Demand remains lukewarm due to the COVID-19 outbreak, which has led OPEC and other producers to cut back some of their production, which they plan to cut back as demand picks up. Meanwhile, the company has a cash-rich balance sheet (it had a cash balance of $ 2.6 billion at the end of 2020) with minimal short-term debt maturities. Devon plans to use some of that money to pay off $ 1.5 billion in debt this year to further reduce interest charges. Given its variable dividend cap of 50% of its excess cash, Devon looks likely to maintain a strong cash position this year, even if it caps that payout in 2021.

A potential for dividends in 2021

Devon Energy’s new dividend framework aims to provide investors with a reliable baseline dividend while immediately rewarding them with higher payouts if crude prices improve. This was certainly the case with the company’s first variable payout, as it was more than double its already attractive base level. Meanwhile, the company appears poised to pay a wave of variable dividends in 2021 as it is poised to produce a massive amount of excess cash at the current price of oil. This makes it one of the most convincing income stocks in the oil patch these days.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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