Members of OPEC+ recently reaffirmed their plans to reduce supplies by over 1 million barrels per day through the end of the year. This production cut has had a noticeable impact on oil prices in recent months, as crude prices have rallied over 15% in the last three months to around $90 per barrel.
OPEC wants oil prices to remain elevated, which is why the group continues to extend its production cuts. That's great news for oil companies because it will enable them to generate more cash.
Many producers plan to return a large portion of their oil-fueled windfall to shareholders. Devon Energy (DVN 0.19%), Pioneer Natural Resources (PXD -2.28%), and ConocoPhillips (COP 0.10%) stand out as the top oil stocks to buy for investors seeking to cash in on the OPEC-led support of the oil market.
Devon's recent dividend decline should reverse
Devon Energy has a clearly defined plan to return a significant percentage of its free cash flow to investors. The oil company established the industry's first fixed-plus-variable dividend framework a few years ago. It pays a base quarterly dividend it can sustain at lower oil prices, and on top of that, it adds up to half its excess free cash in variable dividends.
That payout has risen and fallen with oil prices:
Data source: Devon Energy. Chart by the author.
The dividend's decline should end now that oil prices have rallied and will likely begin heading higher.
The oil company also returns cash to shareholders through its share repurchase program. It has repurchased $2.1 billion in shares since launching the program in 2021, retiring 6% of its outstanding shares, and it will likely continue buying back shares.
Devon's stock price is currently more than 40% below its 52-week high despite the recent surge in crude prices. That makes buybacks a very attractive use of its excess free cash flow.
Pioneer uses its flexibility to repurchase shares
Pioneer Natural Resources also has a well-defined capital return program. It set a framework of returning at least 75% of its free cash flow to investors, and the bedrock of that strategy is a sustainable and growing base dividend. The oil company has the flexibility to return more cash to shareholders through variable dividends and opportunistic share repurchases.
Pioneer prioritized variable dividend payments last year. But it has been more opportunistic with share repurchases this year, given the 20% decline in its stock price from its 52-week high.
The company returned $557 million of the $742 million in free cash flow it generated during the second quarter to shareholders. Over half of that return was its base dividend, while the variable payout was around another quarter of the return. It also repurchased $124 million in shares.
Higher oil prices mean Pioneer Natural Resources will generate even more free cash flow, giving it more money to return to shareholders. It could pay a higher variable dividend and repurchase more of its lower-priced shares.
A well-timed deal adds to ConocoPhillips' cash-return ability
ConocoPhillips has a different approach to returning cash to shareholders: It sets a dollar amount that it targets for investors in a calendar year. This year, the company aims to return $11 billion.
It has a three-tiered capital return strategy: a quarterly dividend, share repurchases, and variable return-of-cash (VROC) payments. ConocoPhillips returned $5.8 billion in cash to shareholders through the first half of this year, $2.8 billion through dividends and VORC payments, and $3 billion in share repurchases.
Conoco typically sets its return-of-capital plan annually, but it will adjust its target based on market conditions. For example, it boosted its 2022 plan by $5 billion in August of that year, pushing its total to $15 billion.
With oil prices rising, ConocoPhillips could return more cash to shareholders next year. It's in an even better position to cash in on higher oil prices after recently exercising its right to buy out its partner's 50% interest in their Surmont joint venture in Canada for $3 billion.
The company estimates the transaction will add about $600 million of annual free cash flow next year, assuming a $60 oil price. With crude well above that level, the deal will be even more accretive, giving it more cash to support its capital return program.
Cash-return machines
Rising oil prices fueled by OPEC's continued support will enable Devon Energy, Pioneer Natural Resources, and ConocoPhillips to generate more cash in the coming months. They aim to return a sizable percentage of that money to shareholders, which makes them stand out as great oil stocks to buy for those who want to cash in on the OPEC-fueled rally in oil.
