Pioneer Natural Resources(NYSE: PXD) is one of the biggest oil and gas producers in the low-cost Permian Basin. Because of that, it has become a cash-flow-generating machine in recent years. That gave it the funds to continue drilling new wells while returning a large portion of its gushing cash flows to shareholders via dividends (base and variable) and share repurchases.
Unfortunately for investors, Pioneer Natural Resources will soon become part of ExxonMobil after the oil giant swooped in to buy the company in a more than $60 billion deal. However, those interested in cashing in on the Permian Basin have options beyond Pioneer Natural Resources. Three top choices with income and upside potential similar to Pioneer are Diamondback Energy(NASDAQ: FANG), Devon Energy(NYSE: DVN), and EOG Resources(NYSE: EOG).
A leading pure-play Permian producer
Diamondback Energy is a pure play on the Permian Basin. Like Pioneer, it holds a meaningful position in the Midland Basin (322,000 net acres compared to 856,000 net acres owned by Pioneer). In addition, it has 146,000 acres in the Delaware Basin side of the Permian (where Exxon currently holds most of its acreage).
The company currently produces 452,800 barrels of oil equivalent per day (BOE/d) from its Permian position. It generates significant cash flow from that production ($1.5 billion in operating cash flow in the third quarter and $820 million in free cash flow). Diamondback Energy is returning most of that excess free cash to shareholders (81% in the third quarter) via dividends (fixed and variable) and share repurchases.
Diamondback Energy has a long runway to sustain and grow its oil production and free cash flow. It has nearly 8,500 remaining drilling locations that are economical at $50 oil and above. That puts it in a strong position to generate lots of cash flow to return to shareholders in the coming years.
Dominated by the Delaware
Devon Energy is a multi-basin producer with operations in the Delaware, Williston, Powder River, and Anadarko basins as well as the Eagle Ford. However, it gets most of its production from the Delaware Basin (440,000 BOE/d compared to 221,000 BOE/d from other regions).
The company generates significant cash flow from its Delaware-concentrated operations. It expects to produce $3.2 billion in free cash next year (20% more than in 2023), driven by falling service costs and a greater focus on drilling in the high-margin Delaware basin. Devon plans to return about 70% of that money to shareholders via dividends (base and variable) and share repurchases. It plans to use its flexibility to lean into share repurchases next year to capitalize on its undervalued share price.
Devon controls about 400,000 net acres in the Delaware Basin with significant remaining drillable inventory (more than 5,000 potential future wells, the fourth largest remaining inventory in the region). That's enough land for Devon to continue drilling wells to sustain its production for decades.
Focused on drilling for premium returns
EOG Resources is also a multi-basin producer. It operates across several U.S. regions, including the Permian. It also has a small international business. Given its vast operations, EOG Resources doesn't break out its production by resource play. However, the company noted in its third-quarter report that the primary driver of its increased production in the quarter was higher output from its Permian Basin position.
The company's diversified operations generate significant free cash flow. EOG expects to produce $5.5 billion of free cash flow in 2023, assuming oil averages $80 per barrel. It had committed to returning 75% of that money to investors (exceeding its 60% minimum target) through a combination of base dividends, special dividends, and opportunistic share repurchases. EOG recently increased its regular dividend by 10% for the next year, continuing the robust growth in its base payout (21% compound annual growth since 1999).
EOG Resources' focus isn't necessarily on the resource play. It drills where it can earn the highest returns and cash flow. The company currently has more than a decade of what it dubs as double premium drilling inventory, which are wells that can deliver a 60%-plus after-tax rate of return at $40 oil and $2.50 natural gas. The Permian is a big part of its remaining high-return inventory.
Great options beyond Pioneer
Pioneer Natural Resources had become a popular oil stock because its Permian-focused position generated lots of cash, which it returned to shareholders via dividends and share repurchases. While Pioneer will soon become part of ExxonMobil, investors have plenty of other compelling options beyond Pioneer. Diamondback Energy, Devon Energy, and EOG Resources all have meaningful positions in the Permian, which should enable them to continue producing lots of cash they can return to investors. That makes them some of the top oil stocks to buy for income and upside potential.
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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends EOG Resources. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.
