Oil prices cooled off considerably in recent months. WTI, the primary U.S. oil price benchmark, recently fell below $70 a barrel. That's a far cry from last year when crude prices spiked into the triple digits following Russia's invasion of Ukraine.
The primary factor weighing on oil prices is concerns we could be barreling toward a recession. That would likely impact oil demand.
However, the International Energy Agency (IEA) doesn't expect demand to cool off this year. Instead, it sees the opposite, and that means oil prices could pick back up in the coming months, taking oil stocks with them. Three top energy stocks to buy on that thesis are Devon Energy (DVN -0.89%), Pioneer Natural Resources (PXD 0.10%), and Marathon Oil (MRO -1.04%).
The catalyst that could send crude prices soaring
In its January oil market report, the IEA forecast that global oil demand would rise by 1.9 million barrels per day (BPD) this year, hitting a record 101.7 million BPD. Fast forward a few months, and the IEA now projects that oil demand will grow to 102 million BPD this year. Fueling that view is an expected recovery in Chinese oil demand and global air travel.
While the IEA expects global supplies to grow this year, it sees demand outpacing output in the second half of the year. This outlook has many in the oil industry anticipating that crude prices will rebound sharply in the coming months and could approach the triple digits by this summer. Higher oil prices would enable oil producers to make more money, which could drive their stock prices higher.
Cash in on crude prices
Devon Energy and Pioneer Natural Resources enable investors to almost immediately cash in on a rebound in oil prices because of their dividend frameworks. They each have fixed-plus-variable dividend policies.
Devon Energy pays a base dividend. In addition, it pays up to half of its post-base-dividend free cash flow to investors each quarter via a variable dividend. That policy allowed the company to pay a gusher of dividends over the past year:
Data source: Deven Energy. Chart by the author.
While Devon's dividend payment has declined along with crude prices in recent months, it could surge if oil rebounds.
Pioneer Natural Resources has a similar framework, with a higher dividend payout ratio of 75% of its post-base-dividend free cash flow. It offers even more income upside potential to higher oil prices:
Image source: Pioneer Natural Resources Investor Relations Presentation.
Given the recent stock price of around $185 a share, Pioneer could pay dividends yielding 11% at $80 oil and 15% if crude averaged $100 a barrel this year.
Gobbling up its stock
Marathon Oil has a different strategy for returning its oil-fueled windfall to investors. While the company does pay a dividend (which has steadily increased over the past couple of years), it primarily returns money to investors by repurchasing shares. Marathon has retired a peer-leading 20% of its stock over the past several quarters:
Image source Marathon Oil Investor Relations Presentation.
Despite all those repurchases, Marathon's stock has lost more than a third of its value from its 52-week high because of falling oil prices. Now the company can buy back even more shares in the future with its oil-fueled cash flows, and those repurchases could drive up its stock price.
Oil appears poised to pick up steam
Despite all the recessionary concerns, oil consumption appears poised to grow sharply this year, fueled by rebounding air travel and Chinese demand. With supplies expected to grow slower than demand, crude prices should start picking back up in the coming months. That would enable oil companies to generate more cash to return to shareholders. Those growing cash returns could give Devon, Pioneer, and Marathon the fuel to produce big-time total returns for their investors.
