After a huge run-up in oil and gas prices following early pandemic lows in 2020, the market started to cool off in late 2022 and throughout 2023. 2023 ended up being a great year for the energy sector, but corporate profits were mostly down.
So far in 2024, oil prices are back on the rise, led by strong demand and tightening supply management -- including OPEC cuts -- as well as ongoing geopolitical tensions. Projected outsize earnings are helping many oil and gas stocks hit all-time highs.
Investors looking for ways to invest in a strong oil market have come to the right place. Three Motley Fool contributors have compiled reports explaining why Chevron(NYSE: CVX), Devon Energy(NYSE: DVN), and Texas Pacific Land(NYSE: TPL) are three dividend stocks to buy now.
Image source: Getty Images.
Chevron is an oil supermajor that's a super way to energize your passive income
Scott Levine (Chevron): With global tensions running high, energy prices have been steadily creeping higher, bringing energy stocks to the top of some investors' minds. Oftentimes, higher energy prices correspond with larger energy company profits, so investors recognize a fortuitous investing opportunity at the moment.
There are many energy options out there that may prove to be winning investments, but Chevron seems like an especially compelling choice right now as a way to play the uptick in oil and gas prices. In fact, with energy prices high or low, Chevron, whose stock has a forward yield of 4.2% at the moment, is one of the best oil stocks that pay dividends available to investors.
Based on the global oil price benchmark, Brent crude, averaging a price of $80 a barrel, Chevron forecasts 2024 daily oil equivalent production of 3.245 million barrels to 3.338 million barrels, representing a year-over-year increase of 4% to 7%. But with higher Brent crude prices oil production could be even greater. Management estimates that with every $10-per-barrel increase in the price of Brent crude, the company could see a daily production increase of 10,000 barrels of oil equivalent. It's not only the upstream business that could benefit though, as higher Brent crude prices could help the company expand its refining margins in 2024.
The prospect of higher Brent crude prices would bode well for Chevron investors, but it's important to remember this above all: Chevron is a solid energy investment regardless of a temporary bump in energy prices. For 37 consecutive years, Chevron has hiked its dividend -- a feat it accomplished despite rising and falling energy prices. And now seems like an especially good time to pick up shares with the stock valued at 7.6 times operating cash flow.
A high-yield oil and gas stock
Lee Samaha(Devon Energy): Devon's dividend yield is 4.5%, an excellent reason for income-seeking investors to buy the stock. However, that's far from the whole story.
On the company's fourth-quarter earnings call in late February, management laid out its potential cash-flow yields based on a range of oil prices per barrel and its current share price at around $43.90. Management argued that its free cash flow (FCF) yield would be 6% with a price of oil of $65 a barrel, 9% at $75 a barrel, and 13% at $85 a barrel.
Interpolating that data with the current price of Devon stock, $52.90, gives an FCF yield of 5% at $65 a barrel, 7.5% at $75 a barrel, and 10.8% at $85 a barrel.
Devon Energy could generate significant cash flow with West Texas Intermediate (WTI) crude oil prices at $85 a barrel and the U.S. Energy Information Administration projecting an average of $84 per barrel this year.
While we don't know precisely what that dividend will be -- Devon pays a base dividend of $0.22 per share and a variable dividend depending on its free cash flow (FCF) -- we do know that management plans to return 70% of its FCF to shareholders, either in the form of dividends or share buybacks.
If the WTI oil price averages $85 a barrel in 2024, it could mean a 10.8% FCF yield, and at least 7.5% of its current market cap returned in dividends and buybacks. While the former catches the eye, buybacks are also highly attractive as they lower the number of outstanding shares and increase the claim on future cash flows for ongoing investors. That's great news if the oil price goes to $100 a barrel.
A passive company packed with passive income potential
Daniel Foelber (Texas Pacific Land): Formed out of the bankruptcy of Pacific Railroad in the 19th century, Texas Pacific Land owns around 880,000 acres of land in West Texas. If you've ever been to West Texas, you know the terrain can be inhospitable to human settlement. But it is gushing with oil reserves.
Texas Pacific makes money from its land through royalties, water sales, and other factors. It typically makes more money when oil and gas prices are higher, but it isn't as correlated to the price of fossil fuels as an exploration and production company.
For example, it reported significantly lower realized oil, natural gas, and natural gas liquids (NGLs) prices in 2023 compared to 2022. The price per barrel of oil equivalent, which is basically a weighted average for oil, natural gas, and NGLs, was 30% lower in 2023 than in 2022. Yet overall revenue was down less than 6%, and net income was down a little over 9% thanks to higher water royalties.
Category | 2022 | 2023 |
|---|---|---|
Oil and gas royalties | $452.43 million | $357.39 million |
Water sales | $84.73 million | $112.20 million |
Produced water royalties | $72.23 million | $84.26 million |
Easements and other surface-related income | $48.06 million | $70.93 million |
Land sales and other operating revenue | $9.97 million | $6.81 million |
Total Revenue | $667.42 million | $631.6 million |
Data source: Texas Pacific Land Corporation.
In the following chart, you can see that Texas Pacific Land consistently makes a profit no matter the cycle due to its low cost and passive business model. It also converts a majority of revenue to net income.
TPL Revenue (Annual) data by YCharts
Texas Pacific rewards its shareholders with quarterly dividends, which vary in size based on its earnings. For example, the company paid $32 per share in 2022 dividends but just $13 per share in 2023.
Texas Pacific isn't the ideal company if you're looking for predictable passive income or to supplement income in retirement. Still, it is a good choice if you want to invest in oil and gas but avoid the volatility that comes with severe downturns.
Should you invest $1,000 in Chevron right now?
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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 Chevron. The Motley Fool has a disclosure policy.
