Oil prices have cooled off considerably over the past few months. Crude was recently down around $90 a barrel, well off its peak of over $120 a barrel following Russia's invasion of Ukraine. The main factor weighing on crude prices is concerns the global economy is slowing down, which could dent oil demand.
However, Goldman Sachs analyst Jeff Currie threw cold water on that idea. He believes that oil prices will return to $120 a barrel as energy shortages start to impact the oil market. Here are three oil stocks to buy if you want to cash in on the potential surge in crude prices that Currie sees ahead.
Increasing its leverage to cash in on higher oil prices
Devon Energy (DVN 0.20%) initially thought it would generate $5 billion in free cash flow this year, assuming crude prices averaged $85 a barrel. It now expects to produce $6.5 billion of free cash, driven by improving production and higher oil prices, banking on $95 crude for the rest of this year. Its free cash flow would be even higher if Currie is right that oil is heading back to $120 a barrel.
Devon Energy expects to return a significant portion of its cash flow windfall to shareholders. The company launched the industry's first fixed-plus-variable dividend framework last year. That sees it pay a growing quarterly base dividend. On top of that, it pays out up to 50% of its free cash flow each quarter via a variable dividend. Its last combined dividend payment was $1.55 per share, up 22% from the prior quarter. At the recent stock price of around $71 per share, Devon offers an 8.7% annualized dividend yield.
That payout will continue rising if crude prices top $120 a barrel again. Devon is in an even better position to capitalize on higher oil prices because it has used the other half of its oil-fueled cash flows to make acquisitions. It spent $865 million to bolster its position in the Williston Basin and another $1.8 billion to buy Eagle Ford producer Validus Energy. It paid around two times cash flow in both deals based on the projection of oil prices at the time. If oil exceeds that forecast, Devon's acquisitions will produce even more cash to support its variable dividend program.
Boosting its returns
Diamondback Energy (FANG 0.40%) estimates it can produce $4.3 billion in free cash this year if crude averages around $90 a barrel, which is near the current level. However, cash flow would surge to $4.9 billion if oil averaged $110 a barrel.
That would give Diamondback Energy more cash to return to shareholders, given its current capital allocation framework. The company recently enhanced its capital-return program, boosting it to 75% of its free cash flow, up from 50%. The company returns that money to shareholders through a rapidly rising base dividend, share-repurchase program, and variable dividend.
Diamondback Energy has boosted its base dividend by 500% since initiating the payout in 2018. Meanwhile, it recently started making variable dividend payments to complement its opportunistic share-repurchase program. It has paid out a combined $3.05 per share each of the last two quarters, implying a 9.1% annualized yield at its current $134 share price. The company also recently doubled its share-repurchase authorization to $4 billion, enabling it to opportunistically buy back more shares during the recent dip in crude prices.
An absolutely enormous dividend
Pioneer Natural Resources (PXD 0.77%) is generating immense free cash flow these days. The company produced $2.7 billion of free cash flow in the second quarter alone.
It's returning nearly the entire windfall to shareholders. It pays a rapidly rising base dividend -- it boosted it 40% this year -- and a variable dividend of 75% of its remaining free cash flow. It also opportunistically repurchases shares. Overall, Pioneer declared $8.57 per share in dividends during the third quarter, representing a jaw-dropping 15% annualized dividend yield on its recent stock price. The company also bought back another $250 million in shares. Those three capital return sources pushed Pioneer's free cash flow payout ratio to more than 95% in the quarter.
Given its sizable variable dividend payout target, Pioneer has the highest dividend yield in the oil patch by a wide margin. That income yield would be even higher if crude prices surged above $120 a barrel. Because of that, it's a great stock for those looking to immediately cash in on higher oil prices.
Get paid even more if crude prices soar
Devon Energy, Diamondback Energy, and Pioneer Natural Resources pay fast-growing base dividends and sizable variable payouts. This variable component enables investors to immediately cash in on rising crude prices. Because of that, this trio stands out as great oil stocks to buy on the thesis that crude prices are about to soar back to their recent peak.