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Energy Investing
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CS on DVNSteady state. We hosted a full day of investor meetings in Toronto with Jeff Ritenour (CFO) and Scott Coody (VP IR). What surprised us the most: the first question in nearly every meeting was if DVN will pivot from its strategy in the current commodity price environment (volatile, but still strong). Unsurprising was DVN’s response: an unequivocal no. The company stressed its reinvestment/FCF/cash return strategy was unveiled nearly two years ago (one of the first E&Ps to lay out an explicit framework, and in our view setting the standard for the sector) when WTI prices were ~$40/Bbl. While oil and gas prices are well above mid-cycle levels imbedded in the initial plan (CSe ~30% reinvestment rate at current strip prices, well below its original 70-80% framework), DVN does not see a compelling reason to deviate from the strategy which continues to resonate – in our view, its early adoption and subsequent execution on cash returns has been the key driver of DVN’s stock price outperformance and valuation re-rating over the past ~18 months. If anything, recent macro uncertainty and inflation/supply chain pressures have DVN conveying an even stronger case for a “steady state” program into 2023, with a focus on delivering/sustaining industry-leading cash returns to shareholders and demonstrating the merits of the capital disciplined, value-focused E&P model. Committed to fixed + variable model; supplemented by sizable buyback. The ongoing debate on variable dividends vs. share buybacks, coupled with a ~30% pullback in the stocks since the end of May, has investors asking if there is a case to lean more heavily into buybacks today. For DVN, the top priority remains the fixed + variable dividend and it is committed to the 50% formula, which on our estimates leaves it with a compelling ~10% yield at current strip prices. On top of that, DVN is executing on a fairly sizable buyback authorization, repurchasing >$800MM worth of its shares in 4Q21-1Q22 and signaling it should work through much (if not all) of the remaining ~$1.0bn authorization by YE22, which would imply buying back ~3% of its current market cap in 2H22. In other words, DVN is demonstrating buybacks are not merely a “toolkit” strategy, but a meaningful component of its return framework. Assuming another ~$1bn buyback in 2023, we see DVN offering a total cash return yield of ~12%, one of the highest among large-cap E&Ps. |
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