Devon Energy Stock: Buy, Sell or Hold?

Devon Energy (NYSE: DVN) is a major oil and natural gas producer based in the US. It has a strong and growing business and a generous dividend yield. There are good reasons to buy and hold the stock. But there’s also a very good reason why many investors would like to avoid it.

Here’s a quick look at the buy, sell and hold decision for Devon Energy.

Buy Devon Energy

In the second quarter of 2023, Devon Energy agreed to buy Grayson Mill Energy’s Williston Basin business. The deal is valued at $5 billion, with $3.15 billion of that consideration being paid in cash and the rest in stock.

Devon Energy expects the transaction to be immediately accretive to earnings as it significantly expands the company’s business in the basin and enables cost savings of up to $50 million. The most important takeaway, however, is that Devon Energy is a growing energy business.

This deal will help strengthen the company’s production, which includes about a decade of drilling opportunities in its portfolio. Even without this acquisition, however, Devon Energy appears to be hitting on all cylinders operationally today. Production in the second quarter of 2024 was ahead of guidance and hit an all-time high, prompting the company to raise its full-year production outlook. Following completion of the acquisition, Devon Energy will provide an update to its guidance to include the impact of the new assets.

If you’re looking for a large US oil and gas company, Devon Energy isn’t a bad choice. However, there is one very important factor to consider here that management has no control over: energy prices.

Sell ​​Devon Energy

The products that Devon Energy sells, oil and natural gas, are commodities. Although these energy sources are vital, they are prone to dramatic and often rapid price fluctuations. Given that Devon Energy’s top and bottom results are driven by the price of oil and natural gas, investors who buy it should understand that its financial results can be extremely volatile.

No matter how well Devon does in business, he cannot escape the impact of commodity prices on his business. A more diversified company, for example Chevron (NYSE: CVX)which has exposure to the entire energy sector (upstream, midstream and downstream) will likely be a more suitable option for conservative investors.

Energy price changes are exaggerated at Devon in that Devon’s dividend is linked to its financial performance, with a base payment that is supplemented by a variable payment.

While you’ll find the dividend yield listed at a generous 4.5% on major online quote services, you simply can’t rely on that figure. The dividend payout changes literally every quarter. In fact, as the chart above shows, the range over the last three years is between $0.35 per share per quarter on the low end and $1.55 on the high end.

The story continues

If you can’t deal with that kind of income fluctuation, maybe because you’re trying to live off the dividends your portfolio throws at you, you shouldn’t own Devon Energy.

Keep up the energy Devon

However, there is a caveat here that could make Devon Energy a great stock to hold for the long term. The chart below overlays the price of West Texas Intermediate crude, a key US energy benchmark, on the dividend. Notice that as oil prices have risen, so have dividends. This shouldn’t come as a shock, given that the dividend is specifically designed to do just that.

But think about the real impact of changing energy prices for a second. Rising oil and natural gas prices mean higher costs for things like heating and gasoline. Growing dividends would have helped offset the impact by providing some cover for your real-world energy costs. In this way, owning Devon could be a good option even for conservative income investors.

However, you need to go in knowing that this is why you own the stock or you will likely end up disappointed. Indeed, when oil prices fall back from peak levels, as they always have in the past, the dividend will be reduced.

Devon is a complex investment

Due to its variable dividend policy, Devon is not a particularly easy energy stock to learn. But if you value the benefit of the dividend policy, this booming oil and gas stock could be worth owning for the long term.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.

Devon Energy Stock: Buy, Sell or Hold? was originally published by The Motley Fool