Oil-and-gas producer Devon Energy (DVN) on Tuesday delivered lackluster fourth-quarter earnings, sending shares lower. And now we’re looking to the company for answers on how it plans to continue returning cash to shareholders in a lower oil-price environment. Total revenue was roughly flat year-on-year, at $4.3 billion, slightly missing analysts’ forecasts of $4.39 billion, according to estimates compiled by Refinitiv. Adjusted diluted earnings-per-share (EPS) advanced 20% compared with the year prior, to $1.66 a share, falling short of expectations for EPS of $1.75, Refinitiv data showed. Note : Devon Energy is scheduled to host its post-earnings conference call on Wednesday at 11:00 a.m. ET. Bottom line This was a disappointing quarter for Devon Energy, despite having managed our expectations given the recent decline in energy prices. The combination of both lower-than-expected production and realized prices resulted in poor cash flow performance in the fourth quarter — and that, in turn, meant the declared fixed-plus-variable dividend distribution to shareholders came in below Wall Street’s forecasts. Compounding the suboptimal results, the company on Tuesday guided for production to be below expectations for both the first quarter and full year 2023, while forecasting capital expenditures to be higher than expected. As a result, Devon stock tumbled roughly 5.5% in afterhours trading, as shares re-rated to the lower cash-return profile. Devon was also squeezed by weaker oil prices, with West Texas Intermediate crude — the U.S. oil benchmark — having fallen more than 9% over the past three months, to around $78 a barrel. Nonetheless, the geo-economic backdrop should ultimately support energy prices this year — including China’s economic reopening, the expected replenishment of the U.S. Strategic Petroleum Reserve and Russia’s ongoing war in Ukraine — and could drive Devon’s shares higher. Cash flow generation and capital returns would likely also rebound in response to rising prices. On Wednesday, we’ll be looking to hear from management on how they intend to improve operating efficiencies to continue supporting shareholder cash returns. In the meantime, our 1 rating on the stock and price target of $82 a share are under review. Capital allocation We pay close attention to cash flow metrics when it comes to our energy exploration-and-production holdings. That’s because the core of our investment thesis for these holdings is that their capital discipline, combined with a favorable commodity price environment, will lead to significant cash flow generation — a large percentage of which should then be returned to shareholders via dividends and buybacks. After accounting for the fixed portion of the dividend, management generally distributes up to 50% of excess free cash flow to shareholders via the variable portion of the dividend. Despite an 11% increase to the fixed portion of Devon’s quarterly dividend for 2023, to 20 cents per…
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