2 High Yielding Oil Stocks To Buy As Crude Prices Rise Towards $100

OTexas Intermediate crude oil prices, the US benchmark, rose above $98 a barrel on Thursday morning as tensions between Russia and Ukraine escalated. This puts oil within striking distance of the famous $100 a barrel mark, a mark that was last reached in 2014 – and many thought oil would never return.

Devon Energy (NYSE:DVN) and Chevron (NYSE: CVX) are the two main oil stocks that benefit from the rise in crude prices. Here’s why both companies could continue to perform well, even if oil and gas prices eventually fall from these levels.

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Rising oil prices pay immediate dividends

Matt DiLallo (Devon Energy): Oil producer Devon Energy launched an innovative framework last year so that its investors could immediately benefit from rising oil prices. It launched a fixed and variable dividend program, the first in the industry, which pays a fixed base payment each quarter. It supplements this with a variable dividend funded by its excess cash. Devon’s variable dividend framework allows it to pay out up to 50% of its excess free cash each quarter after covering its fixed and principal payment schedule.

These payments have increased steadily with oil prices. In 2021, Devon paid a fixed quarterly dividend of $0.11 per share. Additionally, he made variable payouts of $0.19, $0.23, $0.38, and $0.73 per share. In total, Devon paid $1.97 per share in dividends last year.

As oil prices continue to rise, Devon is on track to pay even more dividends in 2022. It has already increased its fixed quarterly payout by 45% to $0.16 per share. On top of that, it declared a variable dividend of $0.84 per share for the first quarter, bringing the total payout to $1 per share. This rate implies a plus of 7% dividend yield at the current Devon share price.

However, given the Devon setting, it will pay an even bigger source of dividends as crude prices climb towards $100 a barrel. This ability to take immediate advantage of rising oil prices makes Devon an excellent oil stock to buy in anticipation of the triple digit price per barrel.

This dividend aristocrat is prepared for higher or lower oil prices

Daniel Foelber (chevron): No one knows how high oil and gas prices will go or when they will start to fall. But what we do know is that Chevron is well positioned to be free cash flow positive even if oil is in the low $40 a barrel range.

Chevron’s advantageous position in the market limited losses when oil and gas prices crashed in 2020. And it’s a position that increases Chevron’s margins during boom times like what we’re experiencing now. During his fourth quarter 2021 earnings call, Chevron CEO Michael Wirth said the following in response to an oil and gas market over $90:

There are many resources that can be produced economically at lower prices than what we see today. And our break-even point reflects that. And so we’re in a period of time where cash flow is strong. As we mentioned in our comments, the last two quarters have been the best two the company has ever had. And last year was 25% better than the best year in our history. We have therefore increased the dividend. The debt has decreased considerably. And we’ve guided up our stock buyback range.

While I agree that Devon Energy is an excellent upstream exploration and production company worth considering now, I think a safer option for most investors is to simply go with Chevron. Chevron has spent the past few years strengthening its balance sheet to improve its financial health. And with oil and gas prices this high, it’s generating a boatload of free cash flow that it can use to pay and grow its dividend.

Chevron is a dividend aristocrat and a S&P500 component that has paid and increased its dividend for at least 25 consecutive years (Chevron has done so for more than 35 years.)

Solid companies with interesting potential

Even if oil and gas prices fall, Devon Energy and Chevron could be great buys for income investors. Investing in equal parts of each stock would give an investor an average dividend yield of 4.7%, which represents a considerable passive income stream. And as long as the oil and gas industry continues to be a major cause of inflation, both companies will have the pricing power to fight rising costs.

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Daniel Foelber has no position in any of the stocks mentioned. Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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Felix J. Dixon