Pure-play energy producer Devon Energy(NYSE: DVN) recently witnessed one of its largest peers, Pioneer Natural Resources(NYSE: PXD), accept an acquisition offer from ExxonMobil(NYSE: XOM). Investors could see that as a sign that Devon is a takeout candidate, too. But the most likely potential buyer, Chevron(NYSE: CVX), chose to buy Hess(NYSE: HES). It seems likely that Devon will remain a stand-alone energy producer for a little longer. That is both good and bad for investors.
Buying Devon Energy is a volatile affair
Devon is fairly well respected as an energy producer. It has a solid financial foundation and a stable production profile. Add in a reasonably attractive cost structure, and there is a lot to like about the company as an investment. For those who want a pure-play energy producer, it is very much worth a look.
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An interesting nuance here is the dividend policy, which is tied to the company's financial performance. Although that effectively makes Devon's dividend variable, it is a pretty clear way to reward investors when performance is strong. In fact, some might even see the dividend here as a hedge against real-world energy costs. Just as prices are rising for things like heating oil and gasoline, Devon's dividend is likely to be on the rise.
Devon is not for the faint of heart
However, if you buy Devon, you have to appreciate that the energy sector is inherently cyclical. The prices of oil and natural gas go up and down in often volatile and dramatic fashion. Devon's stock price will generally follow along for the ride since its business performance is tied directly to commodity prices. To highlight the swings that can take place, Devon reported earnings of $1.43 per share in the third quarter, which was up from $1.08 in the second quarter but less than half the $2.89 it earned in the third quarter of 2022. That's all driven by big swings in oil and natural gas prices.
The impact such swings have on the dividend is notable, as well. In the third quarter of 2022, Devon's dividend hit $1.55 per share. It steadily declined along with energy prices until the second quarter of 2023, when it was at $0.49 per share. However, the subsequent rise in energy prices and improvement in the company's financial performance pushed the third quarter 2023 dividend up to $0.77 per share. That dividend has been announced but not paid yet, so it doesn't show up in the chart below.
More conservative investors probably won't like the performance swings, and dividend investors have to think carefully about the impact of the variable dividend policy. That said, one thing you can't really count on is the dividend yield (roughly 6.2% today), which just isn't a reliable figure given the variable nature of the dividend.
If you like Devon, there's no reason to dump it
Assuming you can handle the inherently volatile nature of a pure-play driller like Devon Energy, there's still a lot of uncertainty around the global shift toward clean energy. An energy transition is definitely taking place, but it is likely to be slow. In fact, the Energy Information Administration, OPEC, and the International Energy Agency, all of which are key industry watchers, essentially agree that oil and natural gas will remain vital sources of energy for decades into the future.
Then, there are the acquisitions that Exxon and Chevron have made. These big investments are clearly telling the world that even the energy sector's largest players still see value in oil and natural gas. In other words, there's no particular reason to dump Devon because of the rapid growth of things like solar and wind, which are really just building off of a small base. An all-of-the-above global energy strategy is firmly in place.
Devon is an acquired taste
Given the big deals that Exxon and Chevron have just announced, investors probably shouldn't go in expecting Devon to be bought out by a bigger player. The most obvious acquirers (Exxon and Chevron) need time to digest their existing deals. So Devon Energy is really a stock you need to consider as a long-term investment if you buy it. For some, that will make a lot of sense, assuming the inherent volatility of the business is something you can stomach. For others, Devon just won't be worth the sleepless nights. But one thing you probably shouldn't worry too much about is Devon's oil and gas being replaced overnight by clean energy, which doesn't look like it is in the cards anytime soon.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Chevron and Pioneer Natural Resources. The Motley Fool has a disclosure policy.
