Oil prices could continue to rise alongside tensions in the Middle East.
Crude oil prices are off to a strong start in 2023. West Texas Intermediate, the main benchmark for U.S. oil prices, has risen from around $70 a barrel at the start of the year to more than $85 dollars per barrel this month. Several factors have fueled oil prices, including growing tensions in the Middle East. Oil could rise even higher if these tensions escalate into a regional war.
Rising oil prices will benefit oil companies. They should produce more free cash flow, which would give them more money to return to investors. Although rising prices are expected to boost most oil stocks, Devon Energy (DVN -0.95%), Diamondback Energy (CROC -0.68%)And ConocoPhillips (COP -0.55%) stand out as three of the best ways to profit from rising crude prices.
A dividend fueled by oil
Devon Energy offers investors one of the best ways to profit from rising oil prices. The oil company pays an innovative, fixed and variable dividend. It pays a base dividend of $0.22 per share each quarter, which it recently increased by 10%. This payment gives it a dividend yield of 1.7% at the recent share price, which is higher than S&P500The dividend yield is 1.4%.
On top of that, Devon pays a variable dividend with a portion of its excess free cash flow. This payment has varied over the years, increasing and decreasing depending on oil cash flows:
As this chart shows, Devon’s last combined dividend payment was $0.44 per share. This puts its annualized dividend yield at 3.3%. Given the rise in oil prices this year, Devon could pay higher variable dividends in future quarters.
In addition to paying dividends, Devon plans to use more of its free cash flow from oil to buy back its shares at low prices. These shareholder returns, combined with rising free cash flow and rising oil prices, could give Devon the fuel to produce strong total returns.
A deal on moving the needles could prove to be an even bigger catalyst
Diamondback Energy followed the Devon Energy manual. The oil company also pays an increasing fixed quarterly dividend which it supplements with variable dividends and share buybacks:
As this slide shows, Diamondback Energy increased its base dividend at a rapid compounded quarterly rate of 9.2%. The company has delivered industry-leading dividend growth since it launched the payout in 2018. It currently offers an equally above-average dividend yield of 1.7% on its base payout.
At the same time, the company regularly pays a variable dividend. It recently paid $2.18 per share on top of its base quarterly rate of $0.90 per share (a 7% increase from the previous level). This pushed its annualized return up to 6% at the recent share price.
Diamondback Energy recently took an important step to improve its ability to profit from rising oil prices. It is buying rival Endeavor Energy Resources in a $26 billion deal to create a leading producer focused on the prolific Permian Basin. The company expects the deal to increase its free cash flow per share by 10% next year, assuming oil prices remain stable. Higher oil prices would make this deal even more accretive. This would allow the company to produce even more free cash flow that it could return to shareholders via dividends (basic and variable) and its significant share repurchase program.
The potential to boost your capital return program
ConocoPhillips sets a capital return target each year, which it adjusts based on market conditions. Last year, it planned to return $11 billion in cash to shareholders through its three-tier framework of paying quarterly ordinary dividends, making quarterly variable cash return (VROC) payments and repurchasing shares. It achieved this goal by paying $5.6 billion in dividends and VROC while purchasing $5.4 billion in stock.
The oil company had initially set a capital return target of less than $9 billion this year due to falling oil prices in early 2023. While the company planned to reduce overall yield, it increased its regular quarterly dividend of 14% at the end of last year. Instead, the reduction would come by paying a lower VROC (it reported $0.58 per share in the first quarter versus $0.60 per share a year ago) and repurchasing fewer shares.
However, rising oil prices could give ConocoPhillips the cash flow and confidence to increase its capital repayment target this year. The company did this in 2022, when oil prices climbed. It initially set a goal of returning $7 billion to shareholders, but ended up sending them $15 billion through higher VORC payments and share buybacks.
These oil stocks will send investors a portion of their oil-generated cash flow
Rising oil prices will allow oil companies to generate more free cash flow this year. Many return some of their excess profits to investors through dividends and share buybacks. Devon, Diamondback and ConocoPhillips stand out because they generally increase their cash yields when prices rise by paying higher variable dividends. Their investors could benefit if crude prices continue to rise this year.
Oil prices could continue to rise alongside tensions in the Middle East.
Crude oil prices are off to a strong start in 2023. West Texas Intermediate, the main benchmark for U.S. oil prices, has risen from around $70 a barrel at the start of the year to more than $85 dollars per barrel this month. Several factors have fueled oil prices, including growing tensions in the Middle East. Oil could rise even higher if these tensions escalate into a regional war.
Rising oil prices will benefit oil companies. They should produce more free cash flow, which would give them more money to return to investors. Although rising prices are expected to boost most oil stocks, Devon Energy (DVN -0.95%), Diamondback Energy (CROC -0.68%)And ConocoPhillips (COP -0.55%) stand out as three of the best ways to profit from rising crude prices.
A dividend fueled by oil
Devon Energy offers investors one of the best ways to profit from rising oil prices. The oil company pays an innovative, fixed and variable dividend. It pays a base dividend of $0.22 per share each quarter, which it recently increased by 10%. This payment gives it a dividend yield of 1.7% at the recent share price, which is higher than S&P500The dividend yield is 1.4%.
On top of that, Devon pays a variable dividend with a portion of its excess free cash flow. This payment has varied over the years, increasing and decreasing depending on oil cash flows:
As this chart shows, Devon’s last combined dividend payment was $0.44 per share. This puts its annualized dividend yield at 3.3%. Given the rise in oil prices this year, Devon could pay higher variable dividends in future quarters.
In addition to paying dividends, Devon plans to use more of its free cash flow from oil to buy back its shares at low prices. These shareholder returns, combined with rising free cash flow and rising oil prices, could give Devon the fuel to produce strong total returns.
A deal on moving the needles could prove to be an even bigger catalyst
Diamondback Energy followed the Devon Energy manual. The oil company also pays an increasing fixed quarterly dividend which it supplements with variable dividends and share buybacks:
As this slide shows, Diamondback Energy increased its base dividend at a rapid compounded quarterly rate of 9.2%. The company has delivered industry-leading dividend growth since it launched the payout in 2018. It currently offers an equally above-average dividend yield of 1.7% on its base payout.
At the same time, the company regularly pays a variable dividend. It recently paid $2.18 per share on top of its base quarterly rate of $0.90 per share (a 7% increase from the previous level). This pushed its annualized return up to 6% at the recent share price.
Diamondback Energy recently took an important step to improve its ability to profit from rising oil prices. It is buying rival Endeavor Energy Resources in a $26 billion deal to create a leading producer focused on the prolific Permian Basin. The company expects the deal to increase its free cash flow per share by 10% next year, assuming oil prices remain stable. Higher oil prices would make this deal even more accretive. This would allow the company to produce even more free cash flow that it could return to shareholders via dividends (basic and variable) and its significant share repurchase program.
The potential to boost your capital return program
ConocoPhillips sets a capital return target each year, which it adjusts based on market conditions. Last year, it planned to return $11 billion in cash to shareholders through its three-tier framework of paying quarterly ordinary dividends, making quarterly variable cash return (VROC) payments and repurchasing shares. It achieved this goal by paying $5.6 billion in dividends and VROC while purchasing $5.4 billion in stock.
The oil company had initially set a capital return target of less than $9 billion this year due to falling oil prices in early 2023. While the company planned to reduce overall yield, it increased its regular quarterly dividend of 14% at the end of last year. Instead, the reduction would come by paying a lower VROC (it reported $0.58 per share in the first quarter versus $0.60 per share a year ago) and repurchasing fewer shares.
However, rising oil prices could give ConocoPhillips the cash flow and confidence to increase its capital repayment target this year. The company did this in 2022, when oil prices climbed. It initially set a goal of returning $7 billion to shareholders, but ended up sending them $15 billion through higher VORC payments and share buybacks.
These oil stocks will send investors a portion of their oil-generated cash flow
Rising oil prices will allow oil companies to generate more free cash flow this year. Many return some of their excess profits to investors through dividends and share buybacks. Devon, Diamondback and ConocoPhillips stand out because they generally increase their cash yields when prices rise by paying higher variable dividends. Their investors could benefit if crude prices continue to rise this year.