Oil companies are feasting on higher oil and gas prices in 2022. ExxonMobil (XOM 2.23%) and Chevron (CVX 2.47%) posted record-shattering results this year. Exxon's profit rose 10% above its second-quarter record in the third quarter to an all-time high of $19.7 billion. Meanwhile, Chevron's third-quarter earnings of $11.2 billion were only 3% below the record it set in the second quarter. Many other oil companies also posted record results this year.
The oil industry is sharing its success with stockholders by paying higher dividends and repurchasing stock. That's allowing anyone who owns oil stocks to grab a share of the industry's windfall.
Many ways to allocate the windfall
Oil companies tend to have clear priorities for the cash flow they produce. They typically include:
- Invest capital to maintain and grow oil and gas production, including acquisitions.
- Pay a sustainable and increasing base dividend.
- Maintain a strong balance sheet.
- Return additional cash to shareholders via share repurchases and extra dividends.
Each company will put a greater emphasis on one over the other. Some will try to balance cash returns with other uses, while others prioritize returning money to shareholders.
Big oil companies typically prefer balance. For example, Exxon chief financial officer (CFO) Kathy Mikells said during the third-quarter conference call: "We're also really focused on ensuring that we're sharing our success with shareholders. We're trying to get that balance right."
It recently increased its quarterly dividend -- the 40th straight year of dividend growth -- and has been steadily buying back shares. Mikells said: "And if you look across the year, that would put us at $15 billion in dividends and about $15 billion in share repurchases. So I'd say both a pretty balanced return to our shareholders." Exxon has balanced cash returns with maintaining a strong balance sheet and investing in growing its production and lower-carbon energy businesses.
NYSE: XOM
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Chevron has a slightly different approach. CFO Pierre Breber said on its third-quarter conference call that its first financial priority is to pay a growing dividend. He said that the company increased its dividend 6% earlier this year. "We've been growing our dividend at a compounded annual growth rate of 6% for 15 years," Breber said.
That provides shareholders with a steadily rising cash return. Breber said that Chevron's fourth priority is to return additional cash through its share repurchase program. The company also uses cash flow to repay debt and invest in growing its traditional and new-energy businesses.
Focused on returning cash
Many other oil and gas producers have chosen to return more of their windfall directly to shareholders through additional dividend payments. Like their big oil brethren, these companies pay a fixed base dividend that they can sustain at lower oil prices. They also aim to increase the base payment each year. And they return a portion of their windfalls to shareholders through a variable dividend.
Devon Energy (DVN 4.27%) led this strategy shift by unveiling the industry's first fixed-plus-variable dividend framework last year. Devon pays a base dividend it can sustain at lower oil prices. On top of that, it makes variable payouts of up to 50% of its excess cash each quarter. That policy enables shareholders to immediately share in its success. While the company's latest combined dividend was down, it still pays investors a lot of cash.
NYSE: DVN
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Several other oil companies have followed Devon's lead with a slight variation. For example, Pioneer Natural Resources' (PXD +0.00%) variable dividend is up to 75% of its excess free cash. Pioneer will also return additional money to shareholders through its repurchase program. Meanwhile, Diamondback Energy (FANG 1.37%) returns up to 75% of its free cash to investors. That includes a combination of the base dividend, variable payout, and share repurchases.
Oil companies are cashing in on higher crude prices this year and sharing their success with higher dividends and buybacks. So anyone who invests in oil stocks can get a piece of the windfall.
