Devon Energy Keeps Its Priorities Straight with A&D

DALLAS—Slow, dragging, strange and strained—apt descriptors of the current A&D market as noted by folks attending Hart Energy conferences this week.

But nevertheless, Devon Energy Corp.’s appetite for appropriate acquisitions remains unbowed.

“There is a lot of volatility right now, and that makes it challenging,” said David Harris, Devon’s executive vice president and chief corporate development officer.

But leadership at Devon tends not to think about markets as dictated by buyers or sellers, he told conference-goers on Oct. 26 at Hart Energy’s A&D Strategies and Opportunities Conference.

“As we’ve been led in this business model, we are bringing back credibility and trust with our shareholders in terms of how they view capital. We’ve stayed disciplined. We stuck to our guns and stuck to our plan.”—David Harris, Devon Energy Corp.

World events, beginning this spring with Russia’s invasion of Ukraine, continue to detonate instability in both global and domestic commodities markets. The upending of the European gas market and an ongoing spat between the U.S. and Saudi Arabia over the release of emergency oil reserves maintain its momentum.

But when Devon weighs an A&D opportunity, leadership instead can focus on its free cash flow priorities and the boxes that need to be checked specifically for its business, Harris said.

“As we’ve been led in this business model, we are bringing back credibility and trust with our shareholders in terms of how they view capital. We’ve stayed disciplined,” he said. “We stuck to our guns and stuck to our plan.”

That means Devon doesn’t have to rely on—or run from—an upended market or other world events to trigger and maintain high commodity prices for the company to maintain its shareholder commitments.

Devon Energy puts its A&D ideas mostly into two buckets.

The first would be the financial bucket, which includes equity metrics and growing shareholder returns. The second bucket is focused on operations. Once the new asset is incorporated into the company, it must fit strategically within the portfolio and it must compete for cash among a host of low-cost, high-return opportunities.

Devon Energy was the best-performing stock on the S&P 500 last year, and at least some of its success is likely based on its ability to keep its shareholders happy while, at the same time, growing the company.

“One of the things that really makes us unique is our ability to proceed with all of the above approach and how we allocate this free cash flow,” Harris said.

Companies including Pioneer Natural Resources Co. and ConocoPhillips Co. were considering the implementation of a variable dividend at the same time that Devon decided to pull the trigger.

Committing to a dividend, but maintaining an element of flexibility, allows Devon to keep some cash available for building the business. The move gave the firm a tool uncommon within the E&P space previously, and the fixed-plus-variable dividend approach has rewarded the firm and its shareholders, according to Harris.

Today, Devon has the ability to evolve on a large scale; the firm can allocate 60% of its free cash flow to shareholder returns and 40% toward building the business for the long term, he said.