Oil prices have been on a blistering run this year. West Texas Intermediate, the main U.S. oil price benchmark, started 2022 at around $75 a barrel and recently topped out at over $130. While crude oil has cooled off a little bit since, it's currently in the tripled digits.
That's enabling oil companies to produce a gusher of cash flow. Most are opting to return that windfall to investors, given that there is so much long-term uncertainty in the oil market as the global economy pivots toward cleaner alternatives. One way they're rewarding shareholders is through dividends, which are rising sharply across the sector.
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Eye-popping raises
Several oil companies have announced dividend increases this year. One of the biggest came from Occidental Petroleum (OXY -0.78%). The company boosted its quarterly dividend payment to $0.13 per share ($0.52 per share annualized). That's a jaw-dropping 1,200% above its prior quarterly rate of $0.01 per share ($0.04 annualized).
That's still well below the $0.79 per share quarterly rate Occidental had been paying before it slashed its dividend when oil prices collapsed in early 2020. But it shows that the company is now in a much stronger financial position, enabling it to start returning cash to shareholders.
Meanwhile, Marathon Oil (MRO -0.22%) has taken a more-incremental approach to increasing its dividend. It most recently gave investors a 17% raise. That was its fourth straight quarter of increasing the dividend. Those raises have added up. Overall, Marathon has boosted its dividend by 133% over the past year. The company has also repurchased $1 billion of its stock in the past few months, retiring about 8% of its outstanding shares.
EOG Resources (EOG -0.04%) gave its investors two raises last year. The biggest was an 82% boost last November. That brought its annualized dividend outlay to $3 per share, double what EOG Resources paid out last year. The company also declared several special dividends: $1 per share last May, $2 per share in November, and another $1 per share in February of 2022.
Smaller raises but more income upside potential
Meanwhile, a growing number of oil producers are adding further income upside by initiating fixed-plus-variable dividend programs. They're setting sustainable base quarterly dividends that they aim to supplement with variable quarterly payments based on their free cash flow.
Devon Energy (DVN -0.49%) initiated the industry's first fixed-plus-variable dividend early last year. It had a base quarterly dividend of $0.11 per share. On top of that, it pays out up to 50% of its excess cash flow each quarter after funding its capital program and base dividend. Devon has since increased its base payment by 45% to $0.16 per share each quarter. Meanwhile, its variable dividend payments have risen from $0.19 per share to $0.84, fueled by higher oil prices.
Pioneer Natural Resources (PXD -3.38%) launched a similar framework, though it's paying out up to 75% of its excess cash after funding the base dividend and capital expenditures. Pioneer recently boosted its base payment by 25% to $0.78 per share each quarter. Meanwhile, its most recent variable dividend was $3 per share. Given its leverage to oil prices and its variable dividend payout target, the company could pay out more than $20 per share in dividends this year, roughly triple what it paid last year.
These variable-dividend frameworks enable investors to immediately cash in on higher oil prices. That's leading more oil companies to consider using this structure to return additional cash to investors above their base dividend instead of share repurchases.
Cashing in on higher crude oil prices
After several challenging years, oil companies are producing cash-flow gushers these days, thanks to surging oil prices. They're opting to return a growing portion of this windfall to shareholders due to oil demand's long-term uncertainty. That's enabling investors to enjoy a windfall of oil-fueled dividends these days.
