4 Reasons That This Oil Stock Could Keep Delivering Market-Smashing Returns

Shares of Devon Energy (NYSE: DVN) have been on fire this year. They're up nearly 35% so far in 2019, blowing past the 13.5% gain in the S&P 500.

And this short-term outperformance appears to be only the beginning. That's because Devon's transformation into a U.S. oil growth company is just starting to pay dividends. That's evident from the comments of CEO Dave Hager on the company's first-quarter conference call, where he provided four reasons the "new" Devon should continue producing strong returns for investors.

1. "Our go-forward asset base is delivering top-tier operating results"

Hager led off his prepared remarks on the call by stating that: "The first quarter was absolutely an outstanding one for 'new Devon.' As we revealed last quarter, we are transforming Devon to a U.S. oil growth company, allowing us to focus on our world-class oil assets in the Delaware Basin, STACK, Eagle Ford, and Powder River Basin."

The numbers back up those claims. Total production at "new" Devon -- which includes its position in those four regions -- rocketed 24% compared with the year-ago period. And output was 9.6% above the midpoint of the company's guidance range thanks to exceptional drilling results, especially in the Delaware Basin. As a result, Devon increased its full-year production growth forecast from 15% to 17%. Hager added that: "if well productivity from our development program continues to outperform expectations, there is certainly additional upside to our growth rates in 2019. Importantly, we are delivering this incremental production growth within the confines of our original capital budget of $1.8 [billion] to $2.0 billion, and this view is backstopped by our strong capital efficiency in Q1."

2. "Our cost reduction efforts are trending ahead of plan"

Next, Hager noted that "a key area of emphasis is the aggressive reshaping of our organization with the singular focus on supporting our U.S. oil portfolio in the most cost-efficient manner possible ... We expect our U.S. oil business to achieve at least $780 million in sustainable annual cost savings by 2021 versus our 2018 baseline." That focus on reducing costs will further improve the company's profitability in the long term.

Hager, however, pointed out that "with our strong cost performance year to date, we are now on track to achieve more than 70% of our targeted $780 million in annual cost savings by year end." That early success in the company's cost-cutting efforts sets Devon up to generate an even bigger gusher of free cash flow this year thanks to higher oil prices.

3. "Our portfolio transformation is on track to be completed by year end"

The last phase of Devon's portfolio reshaping initiative will be to exit its positions in Canada as well as the Barnett Shale. Hager noted that in Canada, the company has "made substantial progress advancing the exit of these assets from our portfolio." It's already "having discussions with multiple parties regarding an outright sale at valuations consistent with our view of the intrinsic value of the asset." Meanwhile, it recently launched the sales process for its position in the Barnett Shale. That has the company on "track to have these assets exit our portfolio by the end of 2019."

The company plans to use the proceeds from these asset sales to pay off another $3 billion of debt. That will not only further strengthen its balance sheet but will also reduce its annual interest expenses by about $130 million, or roughly 45%.

4. "We are delivering on our promise to return cash to our shareholders"

Hager stated that his "final key message is that we remain unwavering in our commitment to capital discipline and increasing cash returns to shareholders." He reiterated that the company wouldn't use the cash windfall from higher oil prices to increase its drilling budget. Instead, that money "will be returned to our shareholders." Hager pointed out that the company is already on track to "reduce our outstanding share count by more than 25% by year end, and owners of our stock will also benefit from our recently raised dividend that is 50% higher than just a few years ago." Both trends appear poised to continue, given the company's promise to return its growing cash-flow windfall to investors.

The dawn of a new era

Devon Energy has spent the past several years repositioning its portfolio to thrive at lower oil prices. That transformation is starting to pay dividends, which was evident in the company's first-quarter report. However, with more progress on the way, this oil producer appears as if it will have the fuel to continue outperforming. That makes it among the top oil stocks to buy these days.

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Matthew 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.