Another prominent factor that should keep Devon on investors’ radars is its hedging strategy, which keeps cash flow and profits relatively predictable. PDC Energy Inc (NASDAQ:PDCE) is a great example. PDC has been actively moving toward a portfolio dominated by liquids but has employed various commodity hedging strategies to minimize its exposure to weak natural gas prices. The end result was a $32 million gain in 2012 for PDC. In similar fashion, Devon Energy Corp (NYSE:DVN) has hedged 115,000 barrels per day of oil production (keep in mind it produced 151,000 per day in 2012) with close to half weighted at $101 per barrel and the rest at a variable rate between $90 and $113 per barrel. Devon also has 60% of its natural gas hedged for 2013.
Show me the money, Devon
Ultimately, what makes Devon particularly attractive is its valuation relative to its peers and its rapidly growing dividend.
Compared with both Chesapeake Energy Corporation (NYSE:CHK) and EnCana, Devon is valued at a lower enterprise value/EBITDA ratio while trading at a comparable price-to-cash-flow to both companies. Devon Energy Corp (NYSE:DVN) certainly isn’t strapped for cash, although I have to admit that a good portion of its cash on hand is from overseas asset sales that could face heavy taxation upon repatriation. Still, Devon’s operating cash flow has resulted in share buybacks and some of the most consistent dividend growth in the sector.
Source: Nasdaq.com.
*Estimated payout based on $0.22 quarterly dividend.
Devon Energy has boosted its dividend eight times since 2004. Although there’s no rhyme or reason to the dividend increases, Devon’s announced 10% dividend boost to $0.22 from $0.20 this month now means that shareholders have seen their quarterly stipend rise by 340% since 2004. To put that another way, Devon has increased its dividend by an average of 24% since 2004. The best part about Devon’s dividend is that it’s completely sustainable — its payout ratio is just 24% of this year’s projected EPS.
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Devon really is one of the most balanced E&P companies in the oil sector. Even though it’s cut back significantly on its natural gas production, it has a more than ample supply to drill for when President Obama’s energy-independence initiatives drive natural gas production and prices higher. In the meantime, oil production and reserves are increasing, and Devon Energy Corp (NYSE:DVN) is doing what it can to reward shareholders for taking the long-term journey. Devon is a phenomenally well-run company, and its payout is definitely something income investors can count on for quite a long time.
The article 1 Great Dividend You Can Buy Right Now originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Devon Energy, has options on Chesapeake Energy, and recommends Chevron.
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