Warren Buffett is growing bullish on the oil market. His company, Berkshire Hathaway, now holds $25.9 billion worth of Chevron (CVX 1.54%), a fivefold increase from its holdings at the end of 2021. Chevron is now Berkshire's fourth-biggest equity holding. Buffett also owns a significant stake in Occidental Petroleum after buying $7 billion in shares last month to complement his legacy investment in the oil giant. Buffett's oil bet is now more than $40 billion.
Clearly, Buffett is bullish on the oil market, fueled by the recent surge in crude prices to more than $100 a barrel. While investors could follow his lead and buy shares of Chevron or Occidental, there are several other compelling ways to invest in the oil patch. Three oil stocks that our energy contributors think investors should consider are Magellan Midstream (MMP), Pioneer Natural Resources (PXD 0.87%), and Devon Energy (DVN 0.78%).
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Happily stuck in the middle
Reuben Gregg Brewer (Magellan Midstream Partners): Chevron is a well-run oil company with a diversified business, but its top and bottom lines are still hugely impacted by the ups and downs of energy prices. The fear of commodity volatility, however, shouldn't keep you out of oil investments; you just need to get the right one in your portfolio. Master limited partnership Magellan Midstream is a good one to consider.
Although Magellan doesn't drill for oil, roughly 25% of its business comes from the pipes and storage assets that help move oil around the country. The remaining 75% of unit operating margin is driven by midstream assets that handle refined products, like gasoline and jet fuel. Magellan's business is tied directly to oil, with all but 9% of the partnership's operating margin coming from reliable and recurring fees.
And the cash flow from Magellan's largely fee-based oil business supports a hefty 8.5% distribution yield. That distribution is covered by distributable cash flow by roughly 1.2 times. Meanwhile, Magellan has long focused on keeping its leverage levels near the low end of its peer group. So there's a material amount of safety here for income investors, highlighted by the partnership's two-decades long history of annual distribution increases. In other words, this is an oil investment with a well-supported high yield but without the commodity risk.
Oil-fueled dividends
Matt DiLallo (Pioneer Natural Resources): Investors bullish on oil prices like Buffett should consider Pioneer Natural Resources. Thanks to its dividend framework, it enables investors to immediately cash in on higher oil prices.
Like many companies, Pioneer Natural Resources pays a fixed quarterly dividend. At the current share price in the $250s, Pioneer's $0.78 per share quarterly payout ($3.12 per share annualized) yields 1.2%, which is slightly below the S&P 500's current 1.5% dividend yield.
In addition to that fixed quarterly cash distribution, Pioneer Natural Resources pays a variable dividend of up to 75% of its quarterly free cash flow. Thanks to the surge in crude prices, it's paying out a gusher of dividends these days. It recently declared a $6.60 per share variable dividend for the second quarter, pushing its total payment to $7.38 per share. That implies a jaw-dropping 13% annualized dividend yield. This payment is almost double the $3.78 per share it paid out during the first quarter, bringing its total dividend outlay to $11.16 per share this year. Pioneer could pay out more than $20 per share in dividends this year, given where crude prices are these days.
Pioneer Natural Resources is returning additional cash to shareholders via its share repurchase program. It bought back $250 million of stock during the first quarter. That pushed its total capital returns to $2 billion, which was 88% of its free cash flow during the first quarter.
Pioneer Natural Resources enables investors to immediately cash in on higher oil prices. That makes it an intriguing option for those who want to earn some income as they follow Buffett into the oil patch.
Want to make money off high oil prices? This stock is for you
Neha Chamaria (Devon Energy): I see two reasons why Buffett is doubling up on Chevron stock: rising oil prices and dividends. While the former should benefit most oil companies, not all pay big, steady, and growing dividends like Chevron. Buffett loves dividends, and if you do too, another oil stock you'll want to look at right away is Devon Energy.
Devon has a strong portfolio of assets primarily in the Delaware Basin, and it's absolutely crushing it when it comes to dividends. That's thanks to its fixed-plus-variable dividend policy, which is making investors a lot of money in a rising oil-price environment. Devon recently increased its fixed quarterly dividend payout by 45% to $0.16 per share. Over and above that, the company is paying out up to 50% of its excess free cash flow in variable dividends each quarter.
Devon's free cash flows are rising rapidly alongside oil prices, and so is its dividend payout. For example, Devon just announced a total dividend of $1.27 per share for its first quarter. It's a record payout for the company, and is driven by record free cash flow that Devon generated in Q1.
Given how strong oil prices are, Devon expects to dole out more than $4.75 in dividend per share this year, representing dramatic growth from its total 2021 payout of $1.97 per share. The company also has a running share repurchase program, which further evidences Devon's focus on shareholder returns. With the company also paring debt aggressively with the incremental cash flows it's earning from higher oil prices, the 6.2%-yielding Devon is an irresistible oil stock you'll want to consider.
