In early 2021, Devon Energy (DVN 0.43%) launched the oil industry's first fixed-plus variable dividend framework. It paid a fixed base quarterly dividend that it routinely increased. In addition, Devon pays a variable dividend of up to 50% of its remaining excess cash flow.
Many oil companies used that blueprint to launch similar frameworks. With their free cash flow soaring along with oil prices, the industry paid a gusher of dividends. However, with oil prices cooling off in recent months, oil companies have less cash to return to shareholders. That's driving down dividend payments for companies like Devon. Meanwhile, several other oil companies are shifting their capital allocation priority from paying variable dividends to repurchasing shares.
This pioneering payout is becoming less of a priority
Pioneer Natural Resources (PXD 0.55%) set its dividend bar higher than Devon Energy, aiming to pay out up to 75% of its total quarterly free cash flow via dividends. With its oil-fueled cash flows soaring last year, Pioneer Natural Resources paid a deluge of dividends. The oil company's total dividend outlay was over $25 per share, putting its dividend yield in the double digits.
Pioneer Natural Resources is refining its capital return framework this year. It still aims to return 75% of its quarterly free cash flow to investors. The foundation of its framework is a strong and growing base dividend. Pioneer recently increased the base payout by 14% to $5.00 per share each year.
However, the additional return of capital will come from variable dividends and opportunistic share repurchases. The company recently refreshed its share repurchase program with a new $4 billion authorization, giving it more flexibility to buy back more shares in the future.
Using its flexibility
Diamondback Energy (FANG 0.26%) initially aimed to return half its free cash flow to shareholders via a combination of base dividends, share repurchases, and variable dividends. It upped the target to 75% last year.
In addition to paying a growing base dividend last year, Pioneer paid sizable variable dividends while repurchasing shares. However, this year, it has put the priority on repurchasing shares. The company only declared an $0.83 per-share dividend in the first quarter ($0.80 per share base and $0.03 per share variable), down from $2.80 per share in total dividends based on its fourth-quarter free cash flow.
Diamondback opted to use its flexible framework to repurchase more shares during the first quarter and capitalize on market volatility. It bought back $332 million of its shares in the first quarter, more than it repurchased in the entire first half of 2022 ($309 million). Considering its bottom-of-the-barrel valuation, Diamondback will likely continue prioritizing share repurchases.
Shifting the emphasis
Coterra Energy (CTRA 0.53%) also established a cash-flow-based capital return target. It set its program at returning more than 50% of its quarterly free cash flow to shareholders through a combination of a base dividend, variable dividends, and share repurchases.
Last year, Coterra emphasized paying dividends. It paid a strong, growing base dividend and even more sizable variable dividends.
However, Coterra updated its shareholder return strategy earlier this year. It's shifting its near-term emphasis to base dividends and buybacks. It increased its base dividend by 33% and authorized a new $2 billion share repurchase program. It believes there's a value disconnect between its current share price and its long-term outlook and financial strength. That's leading it to prioritize repurchasing shares over paying variable dividends for the time being.
The big-time oil-fueled payouts weren't as attractive as oil companies expected
Many oil companies tried to entice investors into buying their shares by paying significant variable dividends. However, the market didn't find those payouts as appealing as oil companies had hoped. That's leading many to shift their capital return emphasis to repurchasing shares, hoping buybacks will boost their valuations. This pivot seems to signal the end of the industry's trend of paying massive dividends, potentially making it less attractive to income-seeking investors.
