Oil prices continue their ascent this year, recently topping $100 a barrel as Russia invaded Ukraine. They could push even higher if global governments place direct sanctions on Russia’s oil industry. That would make an already tight oil market — fueled by growing demand following the pandemic and years of underinvestment — even tighter.
These higher oil prices are benefiting oil producers. Three oil stocks currently cashing in on triple-digit crude prices are Chevron (CVX), Pioneer Natural Resources (PXD), and Devon Energy (DVN). Here’s why they’re ideal options for investors who want to play the return of triple-digit oil prices.
Using the gains wisely
Chevron: When U.S.-integrated energy giant Chevron reported fourth-quarter 2021 earnings, they were nothing short of impressive. Revenues came in at $48.1 billion with earnings of $5.05 billion, or $2.63 per share. That was well above Q4 2020 when the company lost $0.33 per share on revenues of $25.2 billion. The big driver of the year-over-year improvement was basically rising oil prices. Given that oil prices continue to rise, first-quarter 2022 results are likely to be just as impressive.
So clearly, Chevron is cashing in on the high price of oil right now. But that’s not what’s most interesting here. What’s more important is what Chevron is doing with this windfall and that’s investing for the future — only not the future of oil, the future of cleaner alternatives. The company just announced plans to buy Renewable Energy Group (REGI). This $3.15 billion all-cash deal brings with it a collection of refining assets that use things like used cooking oil, waste animal fats, and vegetable oils as feedstocks. These renewable fuels allow Chevron to stick to its core as it greens its business.
Notably, Chevron has been slow to shift toward cleaner alternatives, which has aggravated ESG-inclined investors. However, it is now proving that it has the scale, and thanks to oil price increases, the financial capacity to quickly get into emerging clean energy areas via acquisitions. So not only is Chevron benefiting mightily from higher oil prices, but it’s making sure that it makes good use of the opportunity that high prices are affording it.
A gusher of cash flow and dividends
Pioneer Natural Resources: Pioneer Natural Resources made two bold moves when oil prices were lower, setting it up to cash in on a future rebound in the oil market. In late 2020, it bought Parsley Energy for $7.6 billion. Last year, it followed that up by spending $6.2 billion on DoublePoint Energy. The deals expanded its oil production and scale while reducing its costs.
These acquisitions enabled Pioneer Natural Resources to cash in on higher oil prices last year. The oil producer hauled in a record $3.2 billion in free cash in 2021. That included $1.9 billion in Q4, fueled by oil prices that averaged $76.38 per barrel in the period. Pioneer returned $1.9 billion of that money to shareholders via dividends and its share-repurchase program.
With crude oil recently topping $100 a barrel, Pioneer will generate an even bigger cash flow gusher this year. That sets the company up to pay out an enormous amount of dividends, given its unique framework. In addition to its base dividend — which Pioneer recently increased by 25% — it pays a variable dividend of up to 75% of its excess free cash flow each quarter. At $100 a barrel, Pioneer could pay out up to $27 per share in dividends this year. That implies a potential dividend yield of more than 11% at the recent share price in the $240s. West Texas Intermediate (WTI), the U.S. oil-price benchmark, was recently above $110 a barrel. The rise in crude prices will give Pioneer even more free cash flow to pay out in dividends.
That dividend framework makes Pioneer Natural Resources a great way for investors to cash in on higher crude prices this year.
Expect big dividends as oil prices rise
Devon Energy: Given the unprecedented rally in oil prices, investors in Devon Energy can expect a windfall. That’s not an exaggeration. Devon Energy’s war chest must be swelling with every rise in oil price, and the company wants to return a large chunk of those incremental cash flows to shareholders in the form of dividends. In other words, as Devon cashes in on higher oil prices, so should its investors.
Mid-February, Devon reported stunning numbers for 2021. Its operating cash flow tripled in the year, and the company generated its highest-ever free cash flows, all thanks to higher commodity prices. The company didn’t just boost its dividend but also its share-repurchase program.
Wait. To say Devon simply boosted its dividend would be an understatement. The thing is, Devon pays a fixed as well as a variable dividend under a new dividend policy it initiated in 2021. So far, every quarter, Devon was paying a fixed dividend of $0.11 per share and a variable dividend equal to 50% of the extra cash flow it’s left with after covering its capital expenditure and fixed dividend.
That policy has brought in solid passive income to shareholders so far, including a record total dividend of $1.00 per share they’re about to receive based on the company’s stellar Q4 cash flow growth.
Now, Devon has increased its fixed quarterly dividend to $0.16 per share. At the same time, its variable dividend component should zoom now that crude oil has surpassed $100 per barrel. With Devon’s lower cost production also rising after its merger with WPX Energy in early 2021, it’s a win-win time to be a shareholder in this 4.5%-yielding stock.
Originally published on Fool.com
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Matthew DiLallo has no position in any of the stocks mentioned. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer 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.