My main stock of oil to buy now

Oil prices have risen steadily in recent months. Thanks to support from OPEC, the US oil benchmark, the WTI, recently surpassed $ 57 a barrel, its highest level since last January. Meanwhile, crude may have more leeway as demand is just starting to rebound and American producers preach restraint.

Oil producers are starting to profit after spending much of the past year cutting costs. One of the best placed oil stocks because the current environment is Devon Energy (NYSE: DVN), which makes it a flagship purchase right now.

Positioned to thrive at lower oil prices

Devon Energy has worked hard over the past year to cut costs so they can operate at lower oil prices. The company sold high-cost assets and used the cash to pay down debt, reducing interest charges. These measures resulted in sustainable savings of $ 300 million in treasury costs by the end of last year.

The company has since taken its cost savings initiatives to another level by agreeing to a merger of equals transaction with WPX Energy. The deal will see it increase its cost savings to $ 575 million by the end of this year. Devon only needs oil averaging $ 33 a barrel in 2021 to generate the cash needed to drill enough new wells to maintain its current production level. Add that to a stronger balance sheet thanks to its debt reduction plan, and Devon can thrive on lower oil prices. It can cover its investment program and 2.5% –giving a dividend with space to spare with oil under $ 40 this year.

Strategy is about to pay big dividends

With crude prices currently well above the level Devon needs to maintain current operations, it is on track to generate a significant cash surplus. For example, at $ 50 WTI, Devon could produce over $ 1.25 billion in free cash, that number surpassing $ 2 billion if crude averaged $ 60 this year. That’s a lot of money for an oil company that currently has $ 12 billion market capitalization.

Devon has a range of options for that money. It could use the funds to pay off more debt, drill additional wells to increase production, or return it to shareholders through dividends and share buybacks. Since Devon already has $ 2.1 billion in cash on its balance sheet, it has the funds to meet its goal of reducing debt by $ 1.5 billion in the short term. Meanwhile, it doesn’t look likely that the company will ramp up its drilling program anytime soon. The oil market does not need a new supply given the headwinds of current demand and the fact that OPEC is withholding production to support prices. So, it seems very likely that Devon will return most of the free cash flow it produces this year to shareholders.

The primary method will be its variable dividend program, which the company intends to implement this year now that it has completed its merger with WPX Energy. This strategy will see the company pay up to 50% of its excess free cash each quarter, provided it has a cash balance of more than $ 500 million, a strong balance sheet and a constructive outlook for commodity prices. Since the company currently meets these criteria, it is expected to start making these additional payments soon. These additional dividends could be significantly higher than the base payment, given the amount of excess cash the company appears poised to produce this year.

An ideal way to profit from rising oil prices

Devon Energy’s strategy of transforming itself into a super low cost oil producer is starting to bear fruit. It is set to produce a huge amount of excess liquidity this year thanks to the recent improvement in oil prices. If this is not the only oil share to benefit from this rebound, it stands out among its rivals because it plans to return part of its windfall to shareholders through its variable dividend program. This ability to immediately reap the rewards of rising oil prices is why Devon tops my list as the best oil stock to buy right now.