Oil prices had been stuck in a rut over the past year, bouncing between $65 and $80 a barrel. However, crude has recently broken out of that range, rallying into the mid-$80s, fueled by OPEC's extended production cuts. Crude could continue rallying as demand surpasses supplies in the coming months.
Higher oil prices would be a boon for all oil stocks. However, some look like more compelling investment opportunities, especially for dividend-seeking investors. Pioneer Natural Resources (PXD -2.28%), ConocoPhillips (COP 0.10%), and Devon Energy (DVN 0.19%) stand out to a few Fool.com contributors for their oil-fueled dividends. Here's why they believe this trio could be a great way to cash in on the oil price rally.
Income that's leverage to rising oil prices
Reuben Gregg Brewer (Pioneer Natural Resources): Unlike most companies, Pioneer Natural Resources has a variable dividend policy. The quarterly dividend payment is tied to the company's financial performance, which indirectly means the dividend is linked to oil prices. As an oil and natural gas producer, Pioneer's top- and bottom-lines are driven by how much money it collects per barrel of production. That, of course, goes up and down along with the commodity prices of these vital fuels.
Over most of the past year oil prices have been declining from their 2022 peak. So the dividend has been heading lower. The stock price has been, too, at least until recently. That's because oil prices have started to trend higher again. The stock has followed along, which is a net benefit for shareholders, of course.
But the dividend will likely begin to rise again, too. Only that probably won't happen right away because the dividend is based on past performance. Thus, as the chart above shows, there's a lag between when oil's direction shifts and the dividend reacts. That's likely to happen on the upside, too. But, if energy prices remain strong, Pioneer Natural Resources investors will benefit from both a higher stock price and a higher dividend. This isn't the kind of dividend policy that's right for every investor, but if you are looking to hedge your own energy costs it might be the perfect fit.
Even better positioned to cash in on higher crude prices
Matt DiLallo (ConocoPhillips): ConocoPhillips has a knack for taking advantage of periods of lower oil prices to put its business in an even better position to cash in when prices rise. In 2021, the company closed a $9.7 billion all-stock deal to buy Permian-focused Concho Resources and spent $9.5 billion in cash to buy Shell's assets in that same oil-rich region. Those deals set it up to generate a gusher of cash last year when crude prices spiked.
ConocoPhillips has been returning most of its windfall to shareholders through its three-tiered capital return program. It pays a growing base dividend (ConocoPhillips' dividend yields 1.6% following its 11% increase last year to its current quarterly rate of $0.51 per share). In addition, the company buys back stock and makes variable return of cash (VORC) payments. Those additional cash payouts have totaled $2.50 per share over the past year. That has pushed its dividend yield up to 3.7%.
The oil giant has once again taken advantage of lower oil prices. It recently agreed to acquire TotalEnergies' 50% stake in the Surmont oil sands facility for $3 billion, giving it full ownership. ConocoPhillips estimated that the transaction would add $600 million to its free cash flow next year, based on $60 oil.
With oil prices rallying past $80 a barrel, ConocoPhillips will produce even more cash from Surmount and its other assets. That will give it more money to return to shareholders. The company will likely boost its base dividend this fall and could make higher VORC payments next year. Those dual payouts will provide a solid income return for shareholders, who could also see strong stock price gains fueled by its growing earnings and share repurchases. That income and upside potential makes ConocoPhillips an excellent oil stock to consider buying to cash in on higher crude prices.
A no-brainer stock to buy when oil prices rise
Neha Chamaria (Devon Energy): Devon Energy stock was a hit with income investors in 2022 after the stock's dividends zoomed. Most oil and gas stocks pay a fixed dividend every quarter, with some raising that fixed dividend payout every year. Devon Energy, however, has adopted an offbeat dividend framework. It pays a fixed dividend every quarter, and then tops it up with a variable dividend equal to up to 50% of its free cash flows remaining after funding its fixed dividend.
Understanding why rising crude oil prices are a boon for Devon Energy shareholders doesn't take much. As oil prices rise, so do Devon Energy's cash flows and variable dividends. That's what happened in 2022 – Devon Energy paid a total dividend of $5.17 per share in the year compared with only $1.97 per share in 2021. The company even increased its fixed payout by 11% last year.
Although 2023 has comparatively been a soft year for income investors in Devon Energy so far, it's safe to expect bigger dividends from the stock in the coming quarters if oil prices continue to rise. Devon Energy's financial fortitude, of course, plays a major role here as well.
The oil and gas producer has manageable debt and a low breakeven funding level for 2023, meaning it can generate enough cash flows to fund its capital and operating expenditures at West Texas Intermediate crude oil price as low as $40 per barrel. That gives the company ample leeway to prioritize dividends and deploy any excess cash flow to repurchase shares and repay debt.
A stock that prioritizes dividends and pegs a portion of its payout to oil prices makes for a solid buy when oil prices are on the rise. Devon Energy also offers a high yield of 6.5% currently.
