Devon Energy (DVN -2.75%) has rebuilt its oil and gas resource portfolio over the years into one that can generate a lot of cash. It accelerated that transition in late 2020 when the company agreed to a merger of equals with WPX Energy to create a leading oil and gas producer focused on generating free cash flow and returning money to shareholders. Devon has continued that shift ever since.

That cash return focus was on full display last year. Devon Energy produced $3 billion in free cash flow, $2 billion of which it returned to shareholders. The oil company is on track to produce even more free cash flow this year, which could allow it to return even more money to investors in 2025.

A free cash flow producing machine

Devon Energy generated $6.6 billion in operating cash flow last year. It used about $3.6 billion for capital expenses to maintain and grow its oil and gas production. That enabled the company to produce $3 billion in free cash flow (FCF). It returned about two-thirds of that to shareholders through dividends ($900 million in four fixed quarterly payments totaling $0.88 per share and three variable dividends totaling $0.57 per share) and share repurchases ($1.1 billion).

Devon shifted its capital return strategy away from paying variable dividends in favor of buying back its stock toward the end of the year. In the company's recent earnings call, COO Clay Gaspar said the company bought back $300 million of stock during the fourth quarter -- more than twice as much as it paid out in dividends -- because "we strongly believe that Devon presents a compelling investment opportunity." The main factor driving the decision to ramp up share repurchases has been the decline in its stock price:

DVN data by YCharts

Meanwhile, Devon used the remaining $1 billion of excess free cash flow to strengthen its balance sheet following its $5 billion acquisition of Grayson Mill Energy (funded by issuing $1.75 billion of stock and paying $3.25 billion of cash via cash on its balance sheet and new debt). Even with that large cash outlay, Devon was able to retire $472 million of notes at maturity and rebuilt its cash balance to $846 million by year-end.

Poised to produce more cash in 2025

Devon Energy expects its capital investments, plus the Grayson Mill Energy deal, to increase its production by more than 10% this year. The company anticipates capital spending will be between $3.8 billion and $4 billion this year, which is $200 million lower than its initial guidance thanks to efficiency gains.

At that capital spending rate, Deven estimates that it will produce more than $3 billion in free cash flow this year, assuming crude oil is at $70 per barrel. It averaged $75.79 per barrel last year and was recently above $72.50.

CFO Jeff Ritenour laid out the company's cash return plans on the fourth-quarter earnings call. He noted: "For 2025, we're targeting up to 70% cash return payout for shareholders from generated free cash flow at current strip pricing. Our cash returns will be delivered via our growing fixed dividend and share repurchases." That rate suggests the company could return more than $2.1 billion to shareholders.

The company announced it was raising its dividend about 9% to $0.24 per share. CEO Rick Muncrief added during the call that "we expect a cadence of about $200 million to $300 million a quarter for share repurchases throughout the year." 

An analyst on the call highlighted that these numbers imply cash returns will be more in the range of 53% to 60% of its free cash flow. That's because the company initially plans to continue building cash to cover upcoming debt maturities ($485 million this year and a $1 billion term loan in 2026). As its cash balance and free cash flow profile improve, the company will have more flexibility to return additional money to shareholders during the back half of the year.

A cash-producing and returning machine

Devon's strategy to create a leading oil and gas company focused on producing cash and returning it to shareholders is paying off. This approach could give it the fuel to deliver strong total returns for its shareholders in the coming years.