There's a lot of debate about what's next for oil prices. Crude did a complete round trip last year, spiking into the triple digits following Russia's invasion of Ukraine, only to give back all those gains on macroeconomic concerns by year-end. While those recession worries remain, several upside catalysts could cause crude prices to rebound in 2023.
The best way to cash in on higher oil prices this year is to buy shares of Pioneer Natural Resources (PXD 0.87%). The oil company aims to return three-quarters of its excess cash to investors via its variable dividend. That ability to immediately cash in on crude is why Pioneer is my top oil stock to buy this January.
A top-tier oil company
Pioneer Natural Resources has one of the oil patch's best resource bases and balance sheets. The company owns a top-tier position in the resource-rich Midland Basin in Texas. It has over 25,000 remaining well locations, giving it enough inventory to maintain its current drilling pace for over 20 years. That's the deepest drilling inventory in its peer group.
It's also some of the highest-quality acreage, with leading drilling economics and peer-leading free cash flow per barrel of oil equivalent. Because of that, Pioneer doesn't need to spend much money to explore for additional resources or acquire more acreage. It also requires a low reinvestment rate to maintain and grow its production. That frees up its capital for other uses.
For example, the company produced more than $12 billion of operating cash flow last year. It reinvested less than $4 billion in capital projects, including drilling more wells. That enabled it to produce more than $8 billion in free cash flow.
The company also has a top-notch balance sheet. It has one of the lowest leverage ratios in the industry and lots of liquidity. This means it doesn't need to retain cash to reduce debt like some of its peers. That gives it even more financial flexibility. It allowed Pioneer to return $7.5 billion to investors last year through share repurchases and dividends.
Set up for another dividend gusher in 2023
Pioneer Natural Resources' capital return framework sees it pay a fixed base quarterly dividend that it could sustain at a very low oil price point. In addition, the company pays a variable dividend of up to 75% of its quarterly free cash flow. That's a much higher rate than most rivals.
For example, Devon Energy caps its variable dividend at 50% of its quarterly free cash flow. Meanwhile, Diamondback Energy's 75% payout ratio includes share repurchases and the base payment.
Because of its higher payout ratio, Pioneer paid out $26 per share in dividends last year, giving it a more than 10% dividend yield at the current stock price. That was an industry-leading level, outpacing Devon's 8% yield and Diamondback's 6% annualized yield on its most recent payment rate. Pioneer has also repurchased $1.5 billion of its shares since the end of 2021, reducing the share count by 3%.
Given that framework, the company could pay out significant dividends in 2023 (and beyond), depending on oil prices:
Data source: Pioneer Natural Resources investor relations presentation.
While oil prices are currently in the low $80s, Pioneer CEO Scott Sheffield believes they'll head higher in the coming months. He gave his outlook at a recent industry conference. He thinks OPEC will likely cut their production again, stating, "Saudi is not going to let Brent stay around $75/bbl."
Meanwhile, there are several other potential supply headwinds, including slow U.S. production growth, no further planned releases from the U.S. Strategic Petroleum Reserve, and uncertainty about Russian supply. In addition, there's a potentially significant demand catalyst as Asian countries reopen their economies. These factors lead Sheffield to believe crude will find a base at around $90 a barrel, with an upside to as much as $150 if there's a significant unexpected supply problem.
This outlook suggests Pioneer could pay more than $20 per share in dividends this year. That implies an 8% dividend yield on the current share price. On top of that income, Pioneer's stock price could deliver another year of big gains.
Cash in on crude prices
Pioneer Natural Resources' top-tier resource base and balance sheet allow it to produce significant cash flow. It returns 75% of its excess to shareholders via its variable dividend, allowing its investors to get paid more as oil rises. With the potential for oil to rebound this year, Pioneer looks like the best way to cash in on that recovery.
