While the broader market continues to roar higher, the energy sector has taken a breather. In fact, it's down 4.1% over the last year despite a 20% gain in the S&P 500.
As oil and gas companies report their Q4 and full-year 2023 earnings, it's becoming increasingly clear that the industry is fundamentally sound and a great value now.
Here's why Devon Energy (DVN 0.19%), ConocoPhillips (COP 0.10%), and Hess Midstream (HESM -0.09%) are three high-yield dividend stocks worth buying.
Image source: Getty Images.
Lower energy prices have created a buying opportunity in Devon Energy's stock
Lee Samaha (Devon Energy): Yes, the price of oil has declined from almost $94 a barrel in late September to around $75.5 at the time of writing. And yes, weaker oil demand and strong oil production have led to rising oil inventories (which are usually bearish for the price of oil). Therefore, it's unsurprising that oil stocks have fallen since late September, including Devon Energy, down 12% since the end of September.
Still, there's a need for some perspective here. The economy is passing through a weak period with the brakes put on by central bankers keen to subdue inflation. Yet the price of oil is significantly above where it's been in previous slowdowns -- the grey sections in the chart below indicate recessions.
WTI Crude Oil Spot Price data by YCharts
In addition, the price of oil is still at a level whereby Devon Energy can pay investors a hefty dividend. For example, on its third-quarter earnings call in early November, management gave a range of outcomes for its free-cash-flow (FCF) yield based on the price of oil and its share price on Nov. 3 (the stock closed at $47.34 on that day).
Based on a price of oil of $70 and a share price of $47.34, management predicts an FCF yield of 8% for 2024, implying an FCF per share of $3.79. Now, let's estimate what that might mean for Devon's dividend. The company pays a fixed dividend of $0.20 and a variable dividend of up to 50% of the excess FCF after the fixed dividend is paid.
The share price is now about $42. In this model, after the $0.20 fixed dividend is paid, Devon will have $3.59 per share in excess FCF, and 50% of that, the variable dividend, is about $1.80. Adding the fixed dividend of $0.20 to the variable dividend of $1.80 gives $2, provided that the current stock price is $42, equating to a dividend yield of nearly 4.8% for a price of oil of $70 a barrel in 2024. That would be fine for many income-seeking investors.
ConocoPhillips is ramping up production and raking in the cash flow
Daniel Foelber (ConocoPhillips): 2023 was a great year for ConocoPhillips. The company earned $9.06 in diluted earnings per share (EPS), not quite as good as 2022 but still the second-best year of earnings since 2005. One reason for the strong year was higher production volumes.
ConocoPhillips achieved record production of 1.826 million barrels of oil equivalent per day (boe/d). In 2024, the midpoint of its guidance calls for a 5.7% increase to 1.93 million boe/d. ConocoPhillips didn't give a specific revenue or earnings target, but it did provide some information.
It expects 2024 full-year capital expenditures to be $11.25 billion at the midpoint -- nearly identical to 2023. It forecasts full-year operating costs of $9 billion at the midpoint, higher than 2023 but not by much. Add it all up, and we should expect similar cash flows and earnings in 2024 as long as oil prices are around the same. That rarely happens, so let's assume WTI averages $70 this year, or over 10% less than the 2023 maker price.
ConocoPhillips is unique because it conveniently supplies its cash flow sensitives based on the oil price. For 2024, it estimates a $120 million to $130 million change for every $1 change in WTI between $60 and $90 a barrel. So a 10% year-over-year drop in average oil prices would be close to $1 billion less in cash flow. It sounds like a lot, but ConocoPhillips generated a whopping $10.1 billion in FCF, which goes to show its margin of error in combating lower oil prices.
ConocoPhillips primarily used that FCF to pay $5.6 billion in ordinary and variable dividends and repurchase $5.4 billion in stock. If oil prices fall, ConocoPhillips would probably just pull back a little on its capital return program. In fact, its guidance assumes just that, as ConocoPhillips is forecasting $9 billion in capital returns in 2024 compared to $11 billion last year. In other words, it wants to make sure it can support its capital return program with cash.
Like Devon Energy, estimating ConocoPhillips' exact dividend payout in 2024 is tricky because of the variable dividend. But given what we know from last year and the guidance in the Q4 earnings release, investors should expect a forward yield of around 3.5% to 4.5% from ConocoPhillips.
ConocoPhillips is generating a ton of cash, will keep generating a ton of cash even if oil prices fall, and has significant upside potential if oil prices rise, both in its performance and through the dividend. All told, it's a top exploration and production stock to buy in 2024.
Hess Midstream generates strong cash flow from transporting oil, gas, and water
Scott Levine (Hess Midstream): It's no wonder that income investors are attracted to Devon thanks to its generous dividend. But it's not the only high-yield energy stock in town. Operating in the Bakken shale and Three Forks formation in the Williston Basin, Hess Midstream is another option for those looking to supplement their passive income streams with a stock found in the oil patch. The midstream company's dividend is especially appealing right now, offering a forward dividend yield of 7.8%.
Part of the allure of Hess Midstream is that it inks long-term commercial contracts with customers. This affords management great insight into future cash flows. With this visibility into its potential future financials, management can plan accordingly to allocate capital responsibly. In 2024, for example, Hess Midstream projects oil and gas throughput volumes will rise about 10% compared to 2023, and it further expects annualized growth in gas throughput volumes of approximately 10% from 2024 through 2026. Oil throughput, on the other hand, is expected to grow 10% in 2025 and 5% in 2026.
With regards to cash flow, Hess Midstream anticipates continued adjusted free cash flow growth from which it will source its rising dividend. Hess Midstream generated adjusted free cash flow of $606 million in 2023. Addressing the company's long-term guidance, management projects adjusted free cash flow will rise to $685 million to $735 million in 2024 and rise 10% further in both 2025 and 2026 -- enough to completely fund the targeted dividend payments through 2026.
