Leading oil producing countries have failed to agree on a new production policy. After the talks of the so-called OPEC+ were postponed indefinitely, the price of a barrel of North Sea Brent crude climbed to its highest level since November 2018. Since the existing production cuts are now likely to remain in force, the supply situation on the oil market threatens to tighten. Wall Street was still closed on Monday for the US national holiday. Therefore, US oil stocks were initially unable to react to the failed OPEC+ negotiations. Nevertheless, the sector is likely to remain energy-rich. This also applies to Devon Energy. On its 50th anniversary, the US industry representative is experiencing a stock market comeback: on a one-year horizon, the stock is up almost 170%. This enabled the share to break out of a multi-year downtrend (see chart).
In 1971, Devon Energy started out with five employees and no facilities of its own. Today, the group, which has been listed on the stock exchange since 1988, is one of the leading representatives of the US shale gas industry. At the beginning of its anniversary year, the Oklahoma City-based company significantly strengthened its position. Devon merged with competitor WPX Energy. The resulting company extracts oil and gas from a total of five sites. Management describes the "Delaware Basin" as a particularly capital-efficient growth engine. In Q1 2021, Devon is generating a margin of USD 32.07 per barrel of crude oil equivalent in southeastern New Mexico and West Texas - a good 80% more than in the same period last year. Not just this metric, the quarterly report as a whole was well received on Wall Street.
After heavy losses in the first three months of 2020, Devon managed to turn itself around: the company posted adjusted earnings per share of USD 0.45. Analysts had expected USc 12 less on average. Devon Energy also significantly improved its operating cash flow. At just under USD 600 million, it exceeded the year-earlier figure by more than a tenth in the first quarter. Of course, the comeback in oil prices is helping. From January to March 2021, Devon averaged just under USD 57 per barrel shipped. In 2020, the average selling price had collapsed to less than USD 36. Nevertheless, management managed to generate an operating profit of around USD 1.5 bn and a similarly high cash flow in the Corona year (see chart).
Cash inflows play a key role for CEO Rick Muncrief. The former WPX chief uses cash flow to scale back debt while keeping shareholders happy with attractive distributions. Devon has always been known as a loyal dividend payer. For 28 consecutive years, the profit-sharing payment has been increased. On average, the payment has grown more than 10% per year since 1993. The merged company has once again tightened up its dividend policy: the payout now consists of a fixed and a variable component. In the current year, shareholders can expect a fixed payment of USD 0.11 per share per quarter. For the first three months, management has added a further USc 23 as a variable component.
Despite all the progress, Devon's shares have been very volatile. Year to date, the historical price volatility is more than 50%. By comparison, the S&P 500 volatility, of which the oil company is a member, is around 13%. This enormous discrepancy makes Devon Energy a "coupon giant". Leonteq has reacted by launching two new Barrier Reverse Convertibles on the oil share. In the product currency CHF, the issue pays a quarterly coupon of 13% p.a.. In USD, the guaranteed coupon is 100 basis points higher. The barrier is fixed at a uniform 59% of the initial level. In general, the term ends after 15 months. Before that, the soft-callable function may kick in. Early redemption of the Barrier Reverse Convertible is possible for the first time after six months and then quarterly thereafter.
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