Oil prices have cooled off considerably since peaking last summer. Crude was recently in the mid-$70s, well below the more than $120-a-barrel price point it hit following Russia's invasion of Ukraine.
Many oil market experts expect crude prices to rise again. That includes Scott Sheffield, CEO of oil producer Pioneer Natural Resources (PXD +0.00%). He firmly believes oil will approach the triple digits again this summer. Here's what's driving that view and what it means for investors in oil stocks like Pioneer.
Several catalysts could drive oil prices higher
Pioneer Resources' CEO Scott Sheffield gave his outlook for oil prices on that company's fourth-quarter conference call, stating: "We remain highly constructive on oil prices. I'm still very optimistic that we'll move back into that $90 to $100 range sometime earlier this summer."
NYSE: PXD
Key Data Points
Several factors are driving that view. Sheffield previously pointed out his belief that Saudi Arabia likely doesn't want to see oil dip below $75 a barrel. That will likely lead OPEC to cut its output if oil prices fall further.
In addition, Russia recently said it would cut its production by 500,000 barrels per day starting in March due to the impact of sanctions on its economy. On top of all that, U.S. producers, including Pioneer, are keeping a lid on capital spending, which will limit new supply.
Meanwhile, there are several demand drivers this year. While there are concerns that rising interest rates could slow the global economy and impact demand, the U.S. economy has proven to be highly resilient.
Unemployment remains low, which means consumers should continue spending money. That should drive gasoline demand, especially as we head into the summer driving season. On top of that, demand from China is rebounding significantly following years of pandemic-driven lockdowns.
These catalysts lead the International Energy Agency (IEA) to forecast that global oil demand will grow by 2 million barrels per day this year to a record 101.9 million barrels per day. The IEA sees demand outpacing supplies by the second half of the year. That should drive oil prices higher.
An upcoming gusher of cash flow
Higher oil prices would enable producers to generate even more free cash flow. Based on current oil and gas pricing, Pioneer Natural Resources expects to produce about $4 billion of free cash flow this year. That's less than half last year's $8.4 billion tally, due to lower pricing and increased capital expenditures. However, if crude prices rebound, as Pioneer believes they will, it would generate more free cash flow, nearly all of which it intends to return to shareholders through dividends and share repurchases.
At $80 oil, Pioneer could generate enough cash to pay $20 per share in dividends this year. That's a more than 10% dividend yield at the recent stock price. However, given the company's variable dividend framework, it could generate the free cash flow to pay about $28 per share in dividends at $100 oil. That's a more than 14% yield at the current price.
Likewise, based on current pricing levels, Devon Energy (DVN +0.64%) expects to produce a lot less free cash flow this year. Its current outlook for 2023 would see it generate about $2.5 billion of free cash flow, assuming oil averages $80 a barrel. That's well below the roughly $6 billion it produced last year.
However, if crude prices head back up toward $100 a barrel, Devon would produce an even bigger gusher of free cash flow this year. That could help reverse the current downtrend in its dividend.
NYSE: DVN
Key Data Points
Diamondback Energy (FANG +1.28%) also has significant upside potential to higher oil prices. The company can produce over $3.1 billion of free cash flow at current prices. That puts it on track to return over $2.3 billion to investors this year, given its framework of returning 75% of its free cash flow to shareholders via its base-plus-variable dividend framework and share repurchases. That's about a 9% return yield at the recent stock price.
Free cash flow would top $4.5 billion at $100 oil. At its 75% framework, the return yield would be over 13.5%.
A huge upside catalyst for oil stocks
Oil prices appear poised to heat up this summer as rising demand outpaces supply. That should enable oil companies to generate more free cash flow, the bulk of which they intend to return to shareholders. That potential for high cash flow and returns could boost oil stock prices, making the sector look like an attractive investment opportunity right now.
