Oil prices were already rocketing higher before Russia invaded Ukraine. Now that the U.S. has banned all energy imports from Russia, including oil, coal, and liquified natural gas, the price for a barrel of oil is spiking further.
West Texas Intermediate (WTI) and Brent crude oil trade for north of $120 a barrel at this writing, and the national average price of a gallon of gas is a record $4.25.
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Oil stocks are front and center now for investors, and their performance is starting to outstrip that of the S&P 500 as rising oil prices make them a more profitable business. They're using this newfound wealth to give back to investors in the form of higher dividend payments and stock buybacks.
According to Morningstar, the average dollar amount of dividends among energy companies has grown by over 50% since 2018 compared to just 5% growth during the prior three-year period.
Previously, energy companies were spending what little money was available on new exploration and production projects, and their stocks lagged far behind the market. Over the past decade, the S&P 500 tripled in value while the stocks of energy companies on the index rose only 6% in that time.
This focus on returning value to shareholders now makes it a great time to be investing in energy stocks. They're making more money due to rising prices and are sharing the wealth with their investors, and that makes the following pair of dividend-paying energy stocks the best buys in March.
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1. Pioneer Natural Resources
The pandemic hurt a lot of energy companies as demand withered to virtually nil, and many dividend stocks suspended their payments to conserve cash. Others, like Pioneer Natural Resource (PXD 0.12%), used the opportunity of cratering values to invest in the future, first acquiring Parsley Energy, which added the Midland and Delaware Basins to its already rich Permian assets, and then making a bolt-on purchase of DoublePoint Energy and its own Midland footprint.
The two deals gave Pioneer over 1 million net acres with no exposure to any federal lands while being accretive to its earnings, cash flows, and free cash flow (FCF) generation.
They were timely acquisitions, as Pioneer was able to leverage the higher oil prices that began rising last year to accelerate and increase its dividend payment. Beginning last August, the oil and gas exploration and production sector adopted a variable payout, meaning that in good times, like now investors would reap a windfall, and when the lean times hit, everyone would tighten their belts together. The payment comes on top of the base dividend Pioneer continues to pay.
Pioneer will return additional cash to investors through a new $4 billion stock buyback plan it recently authorized, making this energy stock a top pick for investors.
Image source: Devon Energy.
2. Devon Energy
Devon Energy (DVN 0.92%) introduced the variable dividend to the energy sector when it launched a fixed and variable payout early last year following its acquisition of WPX Energy.
To maximize returns to investors, Devon will pay a base dividend to investors. Once that is funded, as much as 50% of the remaining excess free cash flow will be paid to shareholders in the form of a variable payout each quarter. The company viewed the opportunity as a time to "reward shareholders and differentiate ourselves from peers." Others, like Pioneer, saw the value in sharing the industry's good fortune and adopted a similar policy.
Devon is an extremely low-cost energy producer that says it has designed a capital program that can sustainably operate at a breakeven level if WTI oil tumbles as low as $30 a barrel. Considering oil's prices today, plus the synergies it receives from the WPX merger, Devon is expecting to deliver FCF growth 70% greater than last year's already record-breaking performance.
In 2021, Devon generated $4.9 billion of operating cash flow (triple what it did the year before) and produced $2.9 billion in FCF. It was already expecting to produce excess cash at the previously elevated oil prices, and the current spike will ensure there is no issue whatsoever in funding the $1.6 billion share repurchase plan it authorized.
There is little question that Devon Energy needs to be on every energy sector investor's radar right now.
