Oil prices have bounced around quite a bit over the past year. While crude has come off its recent high in the low $80s, it's still over $70 a barrel. That puts it up almost 50% this year, well above what oil companies expected.
Oil stocks are generating a gusher of cash. While some are using that money to drill more wells or pay off debt, many producers are returning their growing windfall to shareholders. Three of the leaders in returning cash to shareholders are ConocoPhillips (COP 1.23%), Devon Energy (DVN 0.78%), and Pioneer Natural Resources (PXD 0.87%). That makes them great oil stocks to buy in December to cash in on the likelihood of higher oil prices over the next year.
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A three-part plan to return $7 billion to investors
ConocoPhillips recently revealed its 2022 capital program. The U.S. oil giant plans to invest about $7.2 billion to maintain and grow its oil and gas operations. That spending level should enable the company to increase production at a low single-digit rate in 2022, while longer-term investments will reduce its carbon emissions and support future production growth.
Given where oil prices are these days, ConocoPhillips also expects to be able to return about $7 billion to shareholders in 2022, 16% more than this year. It's planning a three-their capital return program:
- Its base quarterly dividend, currently $0.46 a share and yields 2.5%. It expects these regular dividend payments to total $2.4 billion in 2022.
- Up to $3.5 billion of share repurchases, with $1 billion funded by selling its shares in Cenovus Energy (CVE 0.92%).
- A variable return of cash (VROC) of around $1 billion. The company expects to make these payments quarterly. It will pay the first one of $0.20 per share in mid-January.
Investors who want to receive that first VROC payment need to be shareholders of record as of January 3rd. That's another reason why December looks like a great month to buy this oil stock.
Taking the next step in its capital return program
Devon Energy introduced an industry-first fixed plus variable dividend framework earlier this year following the closing of its merger with WPX Energy. The company complements its fixed quarterly dividend (currently $0.11 per share and yielding 1%) with a variable payout of up to 50% of its excess cash flow each quarter after covering capital expenses and the base dividend. It has made an additional payment each quarter this year, paying a total of $1.97 per share of dividends, pushing its total yield over 9%.
Devon Energy expects to return even more cash to shareholders in 2022, seeing the potential for 90% growth thanks to its improving cash flow. In addition to variable dividends, Devon recently launched the next step in its capital return program by authorizing a $1 billion share repurchase program, funded through the other 50% of its excess free cash. That's enough money to repurchase 4% of its outstanding shares at the current market cap. The company's combination of dividends and share repurchases could help fuel strong total returns in 2022, especially if oil prices remain elevated.
A three-pronged value-enhancing plan
Pioneer Natural Resources developed a long-term capital allocation plan designed to grow shareholder value. It aims to reinvest about 50% to 60% of its annual cash flow into its high-return oil business, which should increase its production by up to 5% per year. That reinvestment rate will enable the company to generate lots of free cash flow, the bulk of which it intends on returning to investors.
The base return will come from the company's quarterly dividend. It recently increased that payout by 10% to $0.62 per share, pushing the yield to 1.3%. Meanwhile, it intends to allocate 75% of its remaining free cash flow each quarter to paying a variable dividend. The rest of the money will strengthen its balance sheet and allow it to make opportunistic share repurchases (the company currently has $1.1 billion remaining under its current buyback authorization).
Pioneer Natural Resources expects to pay significant variable dividends in 2022. After paying $6.76 per share in dividends in 2021, it sees the potential to pay up to $20 per share in dividends over the next year, implying a double-digit yield. That big-time payout could fuel robust total returns for investors over the coming years if oil prices cooperate.
Cashing in on crude oil
ConocoPhillips, Devon Energy, and Pioneer Natural Resources are generating enormous amounts of cash these days, thanks to higher oil prices. Furthermore, all three intend on returning even more of this money to their investors over the coming year. That impending windfall makes them stand out as great oil stocks to buy this December to cash in on higher oil prices in 2022.
