Oil prices have cooled off a little as West Texas Intermediate crude prices (the U.S. benchmark) are now hovering in the low $80 per barrel range.
But even at that price, exploration and production companies can make a hefty profit. In fact, the upstream industry is more efficient than ever before, as producers have made technological strides and reduced costs to make sure they can do well even during a downturn.
Oil stocks aren't for everyone. But for investors who believe in the ongoing value fossil fuels will bring to the energy transition, the industry is worth a look.
Chevron (CVX 0.95%), Baker Hughes (BKR 0.93%), and Devon Energy (DVN 0.19%) aren't just well-known industry leaders, but they also happen to be dividend stocks that can boost your passive income stream. Here's what makes each stock a great buy in November.
Image source: Getty Images.
Chevron continues to create value for investors
Daniel Foelber (Chevron): Chevron stock is down over 14% in the last month, capped off by a more than 6% decline on Oct. 27 in response to weaker-than-expected earnings. It was an eventful week for the oil major, which announced it would acquire exploration and production company Hess on Oct. 23 -- marking its largest deal since it bought Texaco over 20 years ago.
For several quarters now, the company has repeatedly said its balance sheet is so strong that there's little need to pay down more debt. It's also been buying back stock and raising the dividend at a torrid rate. In fact, Chevron has returned more than $20 billion to shareholders year to date, an all-time record for the company. Needless to say, it was evident from the writing on the wall that Chevron was ready for a major deal. And ExxonMobil's announcement to buy Pioneer Natural Resources earlier this month gave Chevron even more of a green light to make a deal of its own.
Even after the acquisition -- and despite far lower earnings this year than in 2022 -- Chevron can easily afford Hess. However, by buying back a ton of its own stock and making a major upstream acquisition, Chevron is betting big on fossil fuels. And that bet means that the company is going to be more sensitive to the price of oil.
In mid-September, CEO Mike Wirth went on Bloomberg and said he could see oil at $100 a barrel. And while Chevron would certainly make a lot more money at that oil price, it would be a mistake to assume that it needs oil to be that high to afford to raise the dividend and funding its growth plans.
NYSE: CVX
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For example, Hess' stake in offshore Guyana has break-even prices ranging from $25 a barrel to $35 a barrel. Estimates vary, but Chevron typically says that it can fund its capital commitments and growth initiatives at $50 oil. That's a sizable margin of error to where oil prices are today.
On the surface, Chevron may seem like it's overextending. And the best argument against Chevron is that it should be using its outsized earnings to diversify into lower-carbon and renewable solutions, not double down on oil and gas. But Chevron believes that oil and gas is the best way to deliver returns to shareholders. And so far, it's been right. Chevron remains incredibly well positioned. With the stock at a six-month low and the dividend yield back up to 4.2%, now looks like a good time to consider Chevron stock.
Energy technology and equipment company Baker Hughes has excellent growth prospects
Lee Samaha (Baker Hughes): The clean energy prophets weren't wrong; they were just too optimistic about the timing. The reality is that fossil fuels, notably natural gas, will play a significant role in the transition and afterward as well. In addition, there's plenty of life left in the oil market.
That's music to the ears of Baker Hughes shareholders. The company is benefiting from ongoing strength in the price of oil, enabling solid growth in its oilfield services and equipment business. At the same time, its industrial energy and technology (IET) business is seeing strengthening momentum in orders, notably in LNG. For example, management started the year expecting full-year IET orders of $10.5 billion to $11.5 billion, but the latest guidance calls for $14 billion to $14.5 billion.
The momentum in Baker Hughes' oil and gas businesses means investors can expect good earnings and cash flow. At the same time, it's expanding its new energy solutions (carbon capture, hydrogen, utilization and storage, and emissions management) in line with the transition to clean energy.
NASDAQ: BKR
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Its new energy orders are progressing well, with management expecting $600 million to $700 million in 2023, a figure notably up on the $400 million in 2022. In addition, management believes it will hit $6 billion to $7 billion in new energy orders in 2030 as the transition kicks in and changes the nature of Baker Hughes' business.
With the near-term outlook remaining favorable for oil and gas investment and the company preparing for the long-term transition by growing its new energy business, Baker Hughes is well placed to increase earnings for years to come.
For a high-yield dividend, dive into Devon Energy
Scott Levine (Devon Energy): For investors looking to power their passive income with a rock-solid energy stock, Devon Energy -- and its juicy forward dividend yield of 7.4% -- is a prime choice among those companies operating in the oil patch. Now seems like a particularly opportune time to scoop up shares of the upstream company with the stock sitting in the bargain bin, trading at 4.2 times operating cash flow.
With resources located in several basins -- Delaware, Anadarko, Williston, and Powder River -- Devon Energy is a leading exploration and production company. Besides the geographical diversity of its portfolio, one of the company's most compelling qualities is its strong free-cash-flow generation. In fact, Devon Energy's robust free cash flow will allay the concerns of cautious investors who question whether the company is able to sustain its high-yield dividend while not jeopardizing its financial health.
DVN Dividend Per Share (Annual) data by YCharts.
A peek at the company's dividend policy further illustrates management's focus on keeping Devon Energy on firm financial footing. In addition to a fixed dividend amount ($0.20 per share in 2023), management bases a variable dividend amount on up to 50% of the company's excess free cash flow.
NYSE: DVN
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And it's not just Devon Energy's cash flows that investors find attractive, which reinforces its ability to maintain distributions to investors. But by simultaneously maintaining a conservative approach to leverage, the company has achieved a net debt-to-earnings before interest, taxes, depreciation, amortization, and exploration expense of 0.7. Additionally, its debt is rated investment grade by S&P Global Ratings and Moody's.
