The energy sector has been red-hot in 2024. However, oil prices have stalled, and earnings from major players have been OK, but not incredible.
Investors looking for solid companies in the energy sector that will also benefit from a rise in oil prices could consider ExxonMobil (NYSE: XOM), Baker Hughes(NASDAQ: BKR), and EOG Resources (NYSE: EOG). Here's why all three dividend stocks are worth buying now.
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Higher oil prices and production could lead to surging profits for ExxonMobil
Daniel Foelber (ExxonMobil): ExxonMobil stock took a 2.8% hit on April 26 after reporting lower profits. Even so, the stock is still up big on the year and is hovering around an all-time high.
Earnings came in at $8.2 billion -- 28% lower than Q1 2023, which is a bit surprising considering how strong and remarkably stable oil prices have been. Dig deeper, however, and the main problem isn't the upstream business -- but downstream.
Exxon's refining margins have fallen, and its energy products business was weighed down by maintenance schedules and facility expansion projects. The energy products segment posted $2.8 billion lower earnings than in Q1 2023.
Although Exxon makes the majority of its earnings from upstream, its downstream segment is integral to the broader investment thesis. In Q1 2023, downstream made up over a third of total earnings. It's an overall benefit and adds some diversification for the integrated major. However, the refinery business can do poorly while the upstream business does well.
Despite the downstream doldrums, Exxon is still putting up excellent results that support growth in its fossil fuels business, as well as low-carbon ventures in carbon capture, hydrogen, etc. If oil does hit $100, Exxon would benefit massively. Its production is expected to ramp once it completes the integration of Pioneer Natural Resources (likely later this year) and continues to increase output offshore Guyana.
Exxon is a balanced buy in the oil patch because it has an impeccable balance sheet, low cost of production, diversified business, and a clear roadmap for growth over the medium term and the long term. With a 3.2% yield, Exxon is a worthy dividend stock for folks looking to generate passive income and play an increase in oil prices.
Baker Hughes is more than just oil
Lee Samaha(Baker Hughes): The latest first-quarter earnings report is an excellent time to check in on Baker Hughes, an oil and gas equipment and services company. A relatively high oil price will spur oil-related capital investment. That's good news for the company's oilfield services and equipment (OFSE) segment, which could provide stable support for its growth objectives in its industrial and energy technology (IET) segment.
In fact, management sees a slow and steady increase in upstream oil capital spending. A combination of disciplined investment (by oil majors) and relatively high prices supports a compound annual growth rate of 2% from 2023 to 2030.
That would prove useful as the company grows its IET revenue, not least with liquefied natural gas (LNG) and clean energy technology orders. Natural gas and LNG are considered ideal transition fuels while the world slowly moves toward renewable energy sources.
While its IET orders in the first quarter were not at the record levels of the first quarter of 2023 ($2.9 billion vs. $3.5 billion), the book-to-bill ratio is still at one. Meanwhile, its remaining performance obligations increased to $29.3 billion from $26.5 billion in the same quarter of 2023.
Trading at 16.2 times estimated 2024 earnings and currently trading with a 2.5% dividend yield, Baker Hughes is a good option for income-seeking investors.
EOG Resources is a great choice for income and value investors alike right now
Scott Levine (EOG Resources): While some companies fear higher energy prices, those that operate exploration and production (E&P) businesses like EOG Resources usually can't wait to see the price of crude oil creep higher. And for investors, this could be a harbinger of higher distributions -- or better corporate financial health at the very least.
It's not just the fact that crude oil is inching higher that makes shares of EOG Resources and its 2.7% forward-yielding dividend appealing. Another important characteristic is that EOG is inexpensively valued, making it a good way to power one's portfolio.
Illustrating how beneficial higher crude oil prices can be for the company, EOG Resources imagines two scenarios. In a three-year future from 2024 through 2026 where the benchmark West Texas Intermediate (WTI) averages $65 per barrel (and the Henry Hub price averages $3.25 MMBtu), EOG Resources projects that it will generate $12 billion in cumulative free cash flow.
On the other hand, should WTI average $85 per barrel (with Henry Hub remaining at $3.25 MMBtu), EOG Resources estimates cumulative free cash flow of $22 billion for 2024 through 2026.
For those more concerned with the immediate future, consider the company's outlook for 2024. Should WTI average $75 per barrel (and Henry Hub average $2.50 MMBtu), EOG Resources expects to generate free cash flow of $4.8 billion, of which the company plans on returning $2.1 billion in the form of dividends and $1.3 billion in share buybacks and/or special dividends.
With shares currently changing hands at about 10.4 times earnings -- a discount to their five-year average P/E ratio of 13 -- today seems like a great time for energy investors to power their passive income streams with EOG Resources.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine 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.
