These 3 oil stocks cash in as crude prices top $100 a barrel for the first time in years

Oil prices continue to climb this year, recently topping $100 a barrel as Russia invaded Ukraine. They could push even higher if world governments impose direct sanctions on the Russian oil industry. It would make an already tight oil market — fueled by rising post-pandemic demand and years of underinvestment — even tighter.

These higher oil prices benefit oil producers. Three oil stocks that are currently benefiting from triple-digit crude prices are Chevron (CLC 1.55% ), Pioneer of natural resources (PXD 1.29% )and Devon Energy (DVN 1.22% ). Here’s why they’re ideal options for investors who want to play triple-digit oil price returns.

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Use earnings wisely

Reuben Gregg Brewer (Chevron): When U.S. integrated energy giant Chevron announced its fourth quarter 2021 results, they were nothing short of impressive. Revenue was $48.1 billion with earnings of $5.05 billion, or $2.63 per share. That was well above the fourth quarter of 2020, when the company lost $0.33 per share on revenue of $25.2 billion. The main driver of the year-over-year improvement was essentially higher oil prices. As oil prices continue to rise, Q1 2022 results should be equally impressive.

CLC Chart

CLC given by Y-Charts

So it’s clear that Chevron is taking advantage of the high oil price right now. But that’s not the most interesting thing here. What’s more important is what Chevron does with this windfall and who is investing in the future – but not the future of oil, the future of cleaner alternatives. The company has just announced its intention to buy Renewable Energy Group (REGI -0.36% ). This $3.15 billion all-cash transaction brings with it a collection of refining assets that use things like used cooking oil, waste animal fats and vegetable oils as feedstocks. These renewable fuels allow Chevron to stick to its core business while greening its business.

Notably, Chevron has been slow to shift to cleaner alternatives, which has aggravated ESG-inclined investors. However, it is now proving it has the scale and, thanks to rising oil prices, the financial capacity to jump into emerging clean energy fields quickly through acquisitions. So not only is Chevron profiting powerfully from rising oil prices, but it is ensuring that it is using the opportunity that high prices present to it wisely.

A source of cash flow and dividends

Matt DiLallo (Pioneer of Natural Resources): Pioneer Natural Resources took two bold steps when oil prices were lower, preparing to capitalize on a future rebound in the oil market. At the end of 2020, he bought Parsley Energy for $7.6 billion. Last year, it followed that up by spending $6.2 billion on DoublePoint Energy. The deals increased its oil production and scale while reducing its costs.

These acquisitions allowed Pioneer Natural Resources to take advantage of higher oil prices last year. The oil producer reported a record $3.2 billion in free cash in 2021. This included $1.9 billion in the fourth quarter, fueled by oil prices that averaged $76.38 per barrel during the period. Pioneer returned $1.9 billion of that money to shareholders through dividends and its stock buyback program.

With crude oil recently surging above $100 a barrel, Pioneer will generate an even bigger source of cash flow this year. This places the company at pay a huge amount of dividends, given its unique setting. In addition to its base dividend – which Pioneer recently increased by 25% – it pays a variable dividend of up to 75% of its excess free cash flow each quarter. At $100 a barrel, Pioneer could pay up to $27 a share in dividends this year. This implies a potential dividend yield of over 11% at the recent share price in the $240 range. West Texas Intermediate (WTI), the benchmark for US oil prices, was recently above $110 a barrel. Rising crude prices will give Pioneer even more free cash flow to pay out as dividends.

This dividend framework makes Pioneer Natural Resources a great way for investors to take advantage of rising crude prices this year.

Expect big dividends with rising oil prices

Neha Chamaria (Devon Energy): Given the unprecedented rise in oil prices, investors in Devon Energy can expect a windfall. This is not an exaggeration. Devon Energy’s war chest needs to swell with every rise in the price of oil, and the company wants to return much of that extra cash flow to shareholders in the form of dividends. In other words, as Devon benefits from rising oil prices, so should its investors.

In mid-February, Devon released stunning numbers for 2021. Its operating cash flow tripled during the year and the company generated its highest ever free cash flow, all thanks to the rise raw material prices. The company not only increased its dividend, but also its share buyback program.

Wait. To say that Devon simply increased its dividend would be an understatement. The thing is, Devon pays a fixed and variable dividend under a new dividend policy it initiated in 2021. Until now, every quarter Devon paid a fixed dividend of $0.11 per share and a variable dividend equal to 50% of the additional cash flow it has left after covering its capital expenditure and its fixed dividend.

This policy has so far delivered strong passive income to shareholders, including a record total dividend of $1.00 per share that they are poised to receive based on exceptional cash flow growth from the company in the fourth quarter.

Now Devon has increased its fixed quarterly dividend to $0.16 per share. At the same time, its variable dividend component is expected to rise now that crude oil has risen above $100 a barrel. With Devon’s lower-cost generation also increasing following its merger with WPX Energy in early 2021, it’s a win-win period to be a shareholder in this 4.5% yielding stock.

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

Steve R. Hansen