Energy continues to be the best-performing sector in 2022. In fact, it's the only one not in the red so far this year, and there's a good argument to be made in favor of it staying that way.
Crude oil prices remain over $100 a barrel, while natural gas is over $8 per million British thermal units, its highest level in over 13 years. It's partially because of the war in Ukraine, but energy costs were soaring long before Russia invaded its neighbor.
Image source: Getty Images.
Demand remains robust with global economies reopened, and oil stocks are back in the driver's seat. And they're sharing their large profits with shareholders in the form of dividends and stock buybacks. Where they previously poured all their excess cash into exploration and drilling, today, many energy companies are returning value to shareholders by splitting profits with investors for the first time.
Devon Energy, for example, introduced the variable dividend to the sector last year when it launched a fixed and variable payout following its acquisition of WPX Energy. And that was soon followed by others, including Pioneer Natural Resource, which also pays a variable dividend. It means that in good times, investors reap a windfall, and when things turn south again, as they eventually will, the payout drops.
Now is a great time to be investing in energy stocks since it seems likely that rather than the period of peak oil we were warned about, there is a long runway of growth still to come.
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Size matters
Because oil is ultimately just a commodity traded on world markets, it is also very volatile. But the "supermajors" of the industry tend to be less risky if only because of their far-flung global operations and massive financial reserves. The big players can survive extended downturns.
That's why I like ExxonMobil (XOM +0.30%), the largest energy stock by market cap. During the early stages of the pandemic, it was criticized for prioritizing its dividend, even as it slashed its capital outlay budget, and was one of only a handful of majors that didn't cut or suspend its payout.
It lost $20 billion in 2020, but the dividend remained, although the company didn't increase it during the year, as it usually does.
Exxon has also prioritized lowering its sizable $42.6 billion debt load, increasing expenditures on projects that have the promise to make money while keeping production stable.
NYSE: XOM
Key Data Points
Massive potential at stake
Exxon's portfolio is extensive, and it has a number of high-potential projects from which it should reap significant benefits for years to come. One of the most exciting is off the coast of Guyana, where Exxon recently began producing oil.
It plans to invest between $20 billion and $25 billion annually in the country through 2027 and believes Guyana, which went from zero production three years ago to 340,000 barrels per day today, could produce as much as 1 million per day by the end of the decade. That would make it one of the top 20 oil-producing countries in the world.
Exxon says it has discovered 11 billion barrels worth of oil in its 6.6 million-acre Stabroek block off the coast of Guyana.
Image source: ExxonMobil.
Paying shareholders to buy
Exxon is taking a hit from severing its ties with Russia, writing down $3.4 billion worth of assets in the first quarter as a result of the invasion of Ukraine. Excluding that one-time, after-tax charge, Exxon reported $8.8 billion in profits for the period, up $6 billion from the year-ago period.
It plans to repurchase $30 billion worth of stock through 2023, and it paid out over $3.7 billion in dividends in the quarter. Although it held the line on its dividend in 2020, it still ended up paying out more that year than it did the year before, allowing it to remain a Dividend Aristocrat, and it bumped the payment up in the fourth quarter of 2021. The stock has a 3.9% yield at its current price.
There's no reason to think Exxon won't keep raising its annual dividend for many years to come, making this dividend-paying energy stock a great holding for income investors.
