3 best oil stocks to buy in December

Oil prices have rebounded a lot over the past year. While crude hit its recent high in the 1980s, it is still above $ 70 a barrel. This pushes it up by almost 50% this year, well above the expectations of the oil companies.

Oil stocks generate a burst of money. While some are using the money to drill more wells or pay off debt, many producers are passing their growing windfall back to shareholders. Three of the leaders in returning money to shareholders are ConocoPhillips (NYSE: COP), Devon Energy (NYSE: DVN), and Pioneer of natural resources (NYSE: PXD). This makes them excellent oil stocks to buy in December to take advantage of the likelihood of higher oil prices over the next year.

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A three-pronged plan to return $ 7 billion to investors

ConocoPhillips recently unveiled its 2022 capital program. The US oil giant plans to invest around $ 7.2 billion to maintain and expand its oil and gas operations. This level of spending is expected to allow the company to increase production at a low single-digit rate in 2022, while longer-term investments will reduce its carbon emissions and support future production growth.

Given the current oil price situation, ConocoPhillips also expects to be able to return around $ 7 billion to shareholders in 2022, 16% more than this year. It provides for a three-way return on capital program:

  • Its basic quarterly dividend, currently $ 0.46 per share and yields 2.5%. He waits for these regulars dividend payments total $ 2.4 billion in 2022.
  • Up to $ 3.5 billion in share buybacks, with $ 1 billion funded by the sale of its shares in Cenovus Energy (NYSE: CVE).
  • A variable return on cash (VROC) of approximately $ 1 billion. The company expects to make these payments quarterly. It will pay the first of $ 0.20 per share in mid-January.

Investors who wish to receive this first VROC payment must be shareholders of record on January 3. This is another reason why December seems like a good month to buy this oil stock.

Take the next step in your return on capital program

Devon Energy introduced a first fixed and variable dividend framework earlier this year after closing its merger with WPX Energy. The company supplements its fixed quarterly dividend (currently $ 0.11 per share and earning 1%) with a variable payment of up to 50% of its excess cash flow each quarter after covering capital expenses and the base dividend. He made an additional payment every quarter this year, paying a total of $ 1.97 per share in dividends, bringing his total return to over 9%.

Devon Energy expects to return even more liquidity to shareholders in 2022, seeing potential for growth of 90% from improved cash flow. In addition to variable dividends, Devon recently took the next step in its return on capital program by authorizing a billion dollar share buyback program, funded by the remaining 50% of its excess free cash flow. That’s enough money to buy back 4% of its currently outstanding shares market capitalization. The combination of dividends and company share buybacks could help generate strong total returns in 2022, especially if oil prices remain elevated.

A three-part valuation plan

Pioneer Natural Resources has developed a long-term capital allocation plan designed to increase shareholder value. It aims to reinvest around 50 to 60% of its annual cash flow in its high-yield oil business, which is expected to increase its production by up to 5% per year. This reinvestment rate will allow the company to generate a lot of free cash flow, most of which it intends to return to investors.

The base return will come from the company’s quarterly dividend. He recently increased that payout by 10% to $ 0.62 per share, pushing the return up to 1.3%. At the same time, it intends to allocate 75% of its remaining free cash flow each quarter to the payment of a variable dividend. The rest of the money will strengthen its balance sheet and allow it to make opportunistic stock buybacks (the company currently has $ 1.1 billion remaining under its current buyback authorization).

Pioneer Natural Resources plans to pay large variable dividends in 2022. After paying $ 6.76 per share in dividends in 2021, it is considering the potential to pay up to $ 20 per share in dividends over the next year, which implies a double-digit return. This large payout could generate solid total returns for investors over the next several years if oil prices cooperate.

Profiting from crude oil

ConocoPhillips, Devon Energy and Pioneer Natural Resources are generating huge amounts of money today from rising oil prices. In addition, all three intend to return even more of this money to their investors in the coming year. This impending windfall sets them apart as excellent oil stocks to buy in December to take advantage of rising oil prices in 2022.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

Steve R. Hansen