Oil prices have been stuck in a rut for most of the past year, bouncing between $65 and $80 per barrel. However, the cost of crude oil recently broke out of that range, soaring into the low $90s. It could have further to run in the coming months.

Surging oil prices will supply producers with more cash flow. Some of them plan to return the bulk of their oil-fueled windfalls to shareholders. That makes them great oil stocks to buy as oil prices rally. Pioneer Natural Resources (PXD -2.28%), Devon Energy (DVN 0.19%), and Marathon Oil (MRO 0.11%) stand out from the crowd as the top oil stocks to buy because their shares are still down sharply despite the rebound in crude prices.

A $27 billion to $40 billion windfall

The oil market is playing out exactly as Pioneer Natural Resources expected. The oil company's CEO, Scott Sheffield, laid out his bull case for crude on their second-quarter conference call. He stated that Saudi Arabia's energy minister wanted to stabilize prices at $90 or above. Because of that, he believed the country would extend its production cuts through the end of the year, which it recently did. That move, along with other catalysts, is "supportive for oil pricing in the $80 to $100 range for the remainder of '23 and through '24 on," according to Sheffield.

Pioneer Natural Resources can produce a lot of cash in that oil price range. It could generate $27 billion in free cash flow over the next five years at an average oil price of $80 a barrel, and $40 billion if crude averaged $100 a barrel.

The company plans to return most of that windfall to shareholders. It aims to return 75% of its free cash flow to shareholders via its base dividend, variable dividend, and share repurchase program. It has been using the flexibility of its capital return program to take advantage of the decline in its share price over the past year (shares are currently 12% below their 52-week high) to buy back its stock. It bought back $124 million in shares during the second quarter to reach its 75% return threshold. Higher oil prices would give it even more cash to buy back its shares and pay higher dividends.

Devon's dividend should go higher

Devon Energy has a well-defined plan to return cash to its investors. It established the industry's first fixed-plus-variable dividend framework. In such a framework, the company  pays a fixed base quarterly dividend. In addition, it pays out up to 50% of its excess free cash in variable dividends. Devon will also use some of its retained cash to opportunistically repurchase shares.

Devon's dividend has fallen along with oil prices over the past year. However, rising oil prices will give Devon more cash to pay variable dividends.

Higher oil prices would also give Devon more money to buy back its shares, which currently sit more than 35% below their 52-week high. It bought back $200 million of its stock during the second quarter and has repurchased $2.1 billion since initiating the program in late 2021 to retire 6% of its outstanding shares. Devon has $900 million remaining on its current authorization, which could bring its total share count reduction to 9% since it started the program. The surge in oil could enable Devon to quickly execute that remaining authorization.

A share repurchasing machine

Marathon Oil plans to return at least 40% of its cash flow from operations to investors when crude prices exceed $60 a barrel. The company pays a base dividend that it can sustain at oil prices below $40 a barrel. Share repurchases are the primary method of returning excess cash to shareholders above that base payment.

The oil company has gobbled up its stock over the past two years. It has repurchased $4.2 billion in stock in the last seven quarters, reducing its outstanding shares by a whopping 24%. That's the biggest share count reduction in its sector. That rapidly falling share count enables Marathon Oil to increase its dividend per share without raising the total cash payout.

Despite all those repurchases, Marathon's stock price currently sits nearly 20% below its 52-week high. Because of that, future buybacks can continue to meaningfully reduce outstanding shares. Marathon has $1.8 billion remaining on its current authorization, enough to retire more than 10% of its outstanding shares at the present price. Higher oil prices will enable Marathon to execute that program faster.

Standout oil stocks

Rising oil prices will enable producers to generate more cash. Pioneer Natural Resources, Devon Energy, and Marathon Oil plan to return a significant percentage of their oil-fueled windfalls to investors through dividends and repurchases. Given the decline in their share prices, those buybacks will enable them to retire a meaningful portion of their outstanding stock. Their growing cash flows and falling share counts should eventually boost their share prices. Add higher dividends, and these oil stocks could deliver peer-leading total returns.