This Top Oil Stock Aims to Get a $1 Billion Boost by the End of 2026

Devon Energy (NYSE: DVN) has become a cash-producing machine in recent years. The energy company has invested heavily to grow its scale across several key U.S. oil and gas production basins to reduce costs and enhance its ability to produce free cash flow. That strategy has paid big dividends for investors. It's producing significant excess free cash flow, to the tune of $3 billion last year, the bulk of which it's returning to shareholders through dividends and repurchases. It returned a total of $2 billion in 2024.

However, Devon isn't resting on its laurels. The leading oil stock recently unveiled a bold goal to boost its pre-tax free cash flow by another $1 billion by the end of next year without the benefit of higher oil prices. Here's its strategy to squeeze more cash from its already lucrative oil business.

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Becoming an even more well-oiled, cash-producing machine

Devon Energy recently revealed its value-enhancing business optimization plan. That strategy aims to deliver a $1 billion improvement in its pre-tax free cash flow by the end of next year. The company plans to undertake several initiatives to reach its goal. Those steps include:

• Capital efficiency: Devon expects to capture efficiencies through design optimizations, cycle time reductions, facility standardization, and vendor management to save $300 million.
• Production optimization: The company plans to use advanced analytics to minimize maintenance events, reduce downtime, flatten production declines, and optimize its cost structure to generate $250 million in savings.
• Commercial opportunities: It aims to leverage its scale to enhance commercial contracts to increase realizations, improve recoveries, and lower its cost structure. These initiatives should yield a $300 million boost to its cash flow.
• Corporate cost reductions: Devon plans to reduce its interest expense and streamline its corporate cost structure to save another $150 million.

These initiatives are already well under way. In the press release unveiling the plan, CEO Clay Gaspar stated: "Our organization has been diligently advancing this initiative and has already secured marketing agreements to drive a material margin improvement through year-end 2026. Concurrently, we have implemented technological advancements, including advanced analytics and process automation, that are further enhancing our operating performance."

He noted that these efforts already have the company on track to achieve 30% of its target by the end of this year. That will help give the oil company a boost in the current environment, which has seen a significant recent drop in crude oil prices. Meanwhile, the CEO stated, "We have clear visibility into the remaining objectives and are highly confident in our ability to execute this plan effectively."

A meaningful impact

The company's plan to boost its free cash flow by $1 billion by the end of next year is meaningful. It can help significantly cushion the blow of lower oil prices in the future. For example, at $60 West Texas Intermediate, which is right around the recent price, Devon would only produce about $1.5 billion in free cash flow this year, half of what it delivered last year when it realized an average of more than $75 a barrel for its crude. That suggests Devon's optimization plan would have the same impact as around a $10 increase in the price of a barrel of oil. That will help enhance the durability of its business and help cushion the impact of even lower oil prices in the future.

Devon's ability to meaningfully boost its free cash flow will directly benefit shareholders. That's because the company continues to target returning 70% of its free cash flow to shareholders through dividends and share repurchases, retaining the other 30% to strengthen its already strong balance sheet. Given that target, its plan to boost its free cash flow positions it to return more money to investors in the future.

A winning strategy for shareholders

Devon Energy's new business optimization plan will have a meaningful impact on the company. It will boost its free cash flow by $1 billion, giving it more cash to return to shareholders. The strategy will also help lessen the impact of lower oil prices in the future. These positives add to Devon's appeal as a long-term investment in the oil patch.

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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.