What happened
The oil and gas sector is so hot right now that investors in many of these stocks are making boatloads of money week after week. Among the several outperformers in May, here are three that stood out with their double-digit gains, according to data provided by S&P Global Market Intelligence.
- Chevron (CVX -0.26%): Up 11.5%.
- Devon Energy (DVN 0.26%): Up 28.8%.
- Marathon Oil (MRO -0.29%) Up 26.1%.
All three are upstream oil companies, so one common link evidently buoyed their shares higher last month: oil prices. Yet there were equally important company-specific developments that lifted these stocks even higher.
So what
Crude oil prices have skyrocketed in recent months, and May was no different. U.S. crude benchmark West Texas Intermediate (WTI) jumped from around $105 per barrel at the beginning of the month to almost $115 by the end.
Higher oil prices are all that oil exploration and production companies need to grow their top lines and cash flows, as was evident in recent weeks.
Image source: Getty Images.
Higher prices and sales volumes, for example, drove Chevron's net income in the first quarter to $6.3 billion, up from only $1.4 billion in the year-ago period. Chevron's cash from operations almost doubled year over year to $8.1 billion, while its free cash flow (FCF) surged 144% to $6.1 billion. That's among the highest FCF in the oil giant's history.
Chevron increased its oil and gas production by 10% year over year in the first quarter, with production from the Permian Basin hitting a record high in the quarter. Chevron now expects 2022 Permian production to be at least 15% higher from 2021.
Devon Energy, though, wants to stick with its previous production targets, but that's not stopping the company from earning massive amounts of cash flows. Devon's net income in the first quarter more than quadrupled to $1 billion, and its FCF shot up to $1.3 billion from just about $93 million in the year-ago quarter. It was a record FCF quarter for Devon.
Marathon Oil also wants to keep production at roughly 2021 levels, but its numbers were absolutely stunning. The oil major earned a whopping $1.3 billion in net income in its first quarter compared with only $97 million in the year-ago quarter. That's because Marathon Oil has significant leverage to any upside in oil prices since it limits hedging. So a $1 per barrel change in WTI crude could add as much as $60 million to the company's annual cash flow from operations.
Marathon Oil now expects to generate adjusted FCF worth $4.5 billion this year, or almost 20% of its market capitalization as of this writing.
As you'd expect, all of these companies are using the windfall to shore up their balance sheets and reward shareholders richly. Marathon Oil bumped up its share repurchase program and increased its quarterly dividend by 15% in May, marking its fifth dividend increase in just about a year's time. Chevron is also buying back shares, and it increased its dividend for the 35th consecutive year in early 2022.
When it comes to dividends, though, it's hard to beat the kind of returns Devon Energy is generating. Under Devon's fixed-plus-variable dividend policy, its total dividend payout in the first quarter rose 27% sequentially to $1.27 per share. It was the highest dividend payout in the company's history.
Devon even recently increased its fixed base annual dividend to $0.64 per share, and could pay at least $4 per share in variable dividends this year if WTI crude averages $100 per barrel.
Now what
The thesis to remain invested in these oil stocks is simple: As long as oil prices continue to rise, these companies will make huge sums of money and return a large chunk of it to shareholders.
The OPEC Plus cartel has decided to increase oil production, but oil prices have ironically risen even higher since OPEC's announcement last week; WTI is hovering around $122.70 per barrel as of this writing.
What does that mean for shareholders? It'll take a lot more for oil prices to cool down anytime soon, which also means investors in Chevron, Marathon Oil, and Devon Energy can continue to expect big numbers and sit back and enjoy the passive income they're making from the fatter dividend checks these oil stocks are sending their way.
