Devon Energy (NYSE: DVN) has struck out on several potential acquisition opportunities over the past year. However, the company finally found a deal to its liking in July, agreeing to buy Grayson Mill Energy for $5 billion. The highly accretive transaction is a strong strategic fit for the oil company.
The oil producer is working to close the deal by the end of the third quarter. Given that timing, it should provide the oil stock with lots of momentum heading into 2025. Here's why it expects the deal will pay big dividends for investors in 2025 and beyond.
A perfect strategic fit
Devon Energy recently reported its second-quarter results and held a conference call with investors. The company's Grayson Mill Energy acquisition was a key topic of conversation on that call. CEO Rick Muncrief stated, "We also took important steps to strengthen the quality and depth of our asset portfolio with the accretive acquisition of Grayson Mill."
The CEO highlighted that,
These assets are an excellent addition to our portfolio, fitting perfectly within our broader strategic framework to accumulate resource and grow oil-weighted production in the best parts of the top U.S. shale plays. Upon completion of the transaction, Devon will be one of the largest oil producers in the U.S. with average daily rates estimated at around 375,000 barrels of oil per day. This transaction nearly triples our production and expands our inventory in the Williston Basin. At the current pace of development, we have about 10 years of Bakken project inventory.
The transaction significantly increases the company's scale. It will add over 300,000 acres and 100,000 barrels per day of high-margin production to the company's operations in the Williston Basin. That enhanced scale will enable the company to capture $50 million in cash flow savings from operating efficiencies and marketing synergies. Grayson Mill also has an extensive midstream operation, which will help further enhance its margins.
All fueled up for a strong 2025
"We see significant financial value created from this acquisition," stated Devon's CEO on the call. The CEO noted, "We expect sustainable accretion to earnings and free cash flow." With the company buying the assets at a good value, paying less than four times earnings and an estimated 15% free cash flow yield at $80 oil, the acquisition will boost its earnings, cash flow, and free cash flow. Muncrief noted on the call that "with the Grayson acquisition, we are now positioned to deliver healthy double-digit growth in both oil and free cash flow next year."
Devon, accordingly, expects to return even more cash to shareholders. The deal will enable the oil producer to boost its share repurchase program by 67% to $5 billion. That will give it ample capacity to capitalize on opportunities to repurchase its stock and drive healthy per-share growth in its key financial and operational metrics.
The CEO also stated that we "expect free cash flow from this acquisition to be additive to our dividend payout in 2025 and beyond." Devon has been growing its fixed base dividend at a healthy rate since its merger with WPX Energy in 2020. It has also paid meaningful variable dividends. It paid a total of $0.44 per share of dividends in the second quarter, split evenly between the base and variable dividends.
Given the production, earnings, and cash return accretion expected from the deal, Devon is excited by what's ahead. Muncrief commented, "As I look ahead, the outlook for Devon in 2025 is shaping up to be exceptionally strong." While the company is still in the early stages of putting together its budget for next year, the CEO is "confident that Devon will have one of the more advantaged outlooks in 2025 of any E&P company out there."
About to stop on the gas
Devon Energy's deal for Grayson Mills should really move the needle next year. The company expects to deliver double-digit oil production and free cash flow growth, which should give it the fuel to boost its dividend and buy back more stock. These growth catalysts could provide Devon with the fuel to produce high-octane total returns next year, making it a potentially compelling oil stock to buy right now.
Should you invest $1,000 in Devon Energy right now?
Before you buy stock in Devon Energy, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Devon Energy wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $668,029!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 12, 2024
Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Fueled by a $5 Billion Acquisition, This Oil Stock Expects 2025 to Be "Exceptionally Strong" was originally published by The Motley Fool