After a red-hot run to begin the year, oil prices have cooled off considerably over the past couple of months. Oil was recently down to around $90 a barrel, well off its highs in the $120s from earlier in the year.
However, while oil prices are down, oil pumps are still money-printing machines for most oil companies. Three oil stocks minting a boatload of cash at $90 oil are Devon Energy (DVN -0.89%), Diamondback Energy (FANG 0.43%), and EOG Resources (EOG 0.59%).
Putting its oil-fueled cash flow to work
Devon Energy initially estimated that it would produce $5 billion in free cash flow this year, assuming oil prices averaged $85 a barrel. Thanks to higher-than-expected oil prices during the first half of the year, the company now expects to produce $6.5 billion of free cash (assuming oil averages $95 a barrel during the second half). That's a more-than-25% increase despite service cost inflation and higher capital costs due to a recent acquisition.
Devon has been using its oil-fueled cash flows to pay a monster dividend. The oil company pays a fixed-plus-variable dividend, with the variable payment up to 50% of its post-base-dividend free cash flow. With oil prices soaring, Devon has boosted its dividend by more than 200% over the past year, increasing both payments. The combined dividend has yielded over 8% this year, double the oil industry's average and six times higher than the S&P 500's dividend yield. Devon has also authorized a $2 billion share repurchase program, or enough to retire 6% of its outstanding stock.
The company has also started using its oil-fueled cash flows to buy more cash-gushing oil properties. In June, it agreed to buy the leasehold interests and related assets of RimRock Oil and Gas in the Willison Basin for $865 million. That price was 2.2 times cash flow and a greater-than-25% free cash flow yield. Meanwhile, earlier this month, Devon agreed to buy Validus Energy for $1.8 billion. It paid an even lower value of two times cash flow and a 30% free cash flow yield. These deals will supply the company with even more cash flow in the coming quarters.
Cashing in on higher crude prices
Diamondback Energy generated a record $1.3 billion of free cash flow during the second quarter. That was 35% above the Q1 total, driven by oil prices that averaged $108.80 per barrel in the period, or $97.32 per barrel net of the company's oil hedges. Diamondback Energy used that cash to reduce its net debt by 5%, pay a combined fixed-plus-variable dividend of $3.05 per share (a 9.5% annualized dividend yield on its stock price), and repurchase 2.3 million of its shares.
While lower oil prices will impact Diamondback's cash flow, the company estimates it can produce $4.3 billion in free cash this year at $90 oil. It plans to return 75% of that money to shareholders via dividends and its stock repurchase program. That's up from 50% earlier this year. The company also doubled its repurchase authorization to $4 billion. With lower oil prices sending Diamondback Energy's stock price down nearly 20% from its peak, its repurchase program can retire even more shares.
Prioritizing dividend payments
EOG Resources produced $3.6 billion of free cash flow during the first half of 2022. The oil giant said it could make another $4.1 billion in the second half if oil averages $95 per barrel. While that's a little above the current price, the oil company is still on track to produce a prodigious amount of free cash flow this year.
EOG Resources plans to return at least 60% of that money to shareholders. Its primary focus is to pay a growing base dividend, which it set at $3.00 per share this year. It offers one of the highest base dividend yields in the oil patch at around 2.5%.
In addition, EOG declared another $4.30 per share in special dividends this year, bringing its total committed cash payout to $4.3 billion. The company intends to use its remaining free cash to strengthen its balance sheet, make low-cost property acquisitions, and possibly return additional money to shareholders. Meanwhile, it will likely continue growing its base dividend, which has expanded at a more-than-20% annual rate over the years.
Even $90 oil is a great price for these oil stocks
While oil prices have lost their handle on the triple digits, Devon Energy, Diamondback Energy, and EOG Resources can still produce a gusher of cash at $90 a barrel. As a result, they expect to continue paying big-time dividends to their investors. That makes them great oil stocks to consider buying in the current environment to cash in on crude prices.
