Pioneer Natural Resources (PXD) is a U.S. onshore energy driller. With the rapid increase in energy prices in 2021, the company switched its dividend policy to better reward investors. It was a cash bonanza for shareholders.

But the dividend policy was just changed again. The outcome from this change should be just as positive for investors, but in a different way.

What goes down

The big story behind Pioneer's dividend change in 2021 was basically oil prices. In 2020 the efforts to slow the spread of the coronavirus pandemic, which effectively shut down vast swathes of the global economy, led to a massive price decline in oil. When economies opened up again, oil prices rose dramatically. In an effort to reward investors for owning the stock, Pioneer linked its dividend to financial performance.

A compass with the arrow pointing to the word strategy.

Image source: Getty Images.

As an energy producer, Pioneer's results tend to be extremely strong when oil and natural gas prices are high. And, conversely, when commodity prices are weak, performance tends to be weak. This shouldn't be a shock to anyone, given that this is pretty much the typical energy cycle, with good times following bad ones and vice versa. But the benefit for shareholders of this dividend change was pretty intense. 

In 2020 the company paid $2.20 per share in dividends for the year. In 2021 that jumped to $6.83. In 2022 it increased again to just over $25 per share for the year. Through two quarter of 2023, Pioneer has paid out nearly $9 per share in dividends. That up and down tracks well with oil prices, which have receded from their peak levels, taking the dividends down along with them.

PXD Dividend Per Share (Quarterly) Chart

PXD Dividend Per Share (Quarterly) data by YCharts

All in, the performance-linked dividend has probably proven to be a good thing for investors.

The next iteration

Dividend policy, however, is at the discretion of the board of directors, and subject to change. And that's exactly what's happened at Pioneer (again). The new policy is to allocate 15% of free cash flow to the base dividend, with 60% earmarked for the variable dividend. Still a very generous plan on the dividend front. The remaining 25% is set to go toward debt reduction, which should position the company well for when the next material industry downturn comes along. And, given the history of the energy sector, a downturn is inevitable. 

To be fair, Pioneer isn't wildly over leveraged. The debt-to-equity ratio is a very reasonable 0.27 times. That compares to peer Devon Energy's (DVN -0.39%) 0.59 times (Devon also has a variable dividend policy). In fact, Pioneer's debt-to-equity ratio is just slightly higher than that of ExxonMobil (XOM 0.99%), which sits at 0.21 times. And Exxon is generally considered one of the financially strongest companies in the energy sector.

But Pioneer's absolute debt level has increased dramatically thanks to acquisition activity. To put some numbers on that, Exxon's total debt has fallen 40% over the past three years. Devon's debt level has increased 50%. And Pioneer's debt has increased by nearly 170%. While leverage is reasonable, it does seem prudent for the company to bring its absolute debt levels back down again given the swift increase. 

Preparing for the down times

At one point, Wall Street wanted production growth at almost any cost from U.S. onshore drillers. Then that shifted to drillers like Pioneer returning cash to investors. The company has now taken the issue to a new level, focusing on both dividends and, essentially, preparing for the next big industry downturn by increasing the importance of debt reduction. If you are a long-term investor in Pioneer stock, you should be pleased with this decision given the inherently cyclical nature of the energy sector. Maybe you won't get as big a dividend check, but the company's ability to pay well in good times and bad, one of the hallmarks of Exxon, could be materially improved.