Why oil stocks of Chevron, Devon Energy and Marathon boomed in May

What happened

The oil and gas sector is so hot right now that investors in many of these stocks are making tons of money week after week. Among May’s many outperformers, here are three that stood out for their double-digit gains, according to data provided by S&P Global Market Intelligence.

  • Chevron (CLC 0.52%): Increase of 11.5%.
  • Devon Energy (DVN -0.14%): Increase of 28.8%.
  • Marathon oil (MRO -0.75%) Up 26.1%.

All three are upstream oil companies, so one common thread obviously drove their stocks higher last month: oil prices. Yet there have been equally significant company-specific developments that have driven these stocks even higher.

So what

Crude oil prices have skyrocketed in recent months, and May was no different. US benchmark West Texas Intermediate (WTI) crude fell from around $105 a barrel at the start of the month to nearly $115 at the end.

Rising oil prices are all oil exploration and production companies need to grow their top line and cash flow, as has been evident in recent weeks.

Image source: Getty Images.

Higher prices and sales volumes, for example, boosted Chevron’s first-quarter net profit to $6.3 billion, up from just $1.4 billion a year ago. Chevron’s operating cash nearly doubled year over year to $8.1 billion, while its free cash flow (FCF) jumped 144% to $6.1 billion . This is one of the highest FCFs in the history of the oil giant.

Chevron increased oil and gas production 10% year over year in the first quarter, with Permian Basin production hitting a record high in the quarter. Chevron now expects Permian production in 2022 to be at least 15% higher than in 2021.

Devon Energy, however, wants to stick to its previous production targets, but that’s not stopping the company from earning massive cash flow. Devon’s first-quarter net income more than quadrupled to $1 billion, and its FCF soared to $1.3 billion from about $93 million in the year-ago quarter. It was a record FCF quarter for Devon.

Marathon Oil also wants to maintain production at around 2021 levels, but its numbers were absolutely staggering. The oil major posted a whopping $1.3 billion net profit in the first quarter, compared with just $97 million in the year-ago quarter. This is because Marathon Oil has a large leverage effect on any rise in oil prices, as it limits coverage. Thus, a change of $1 per barrel of WTI crude could add up to $60 million to the company’s annual cash flow.

Marathon Oil now expects to generate adjusted FCF worth $4.5 billion this year, or nearly 20% of its market capitalization at the time of writing.

As you’d expect, all of these companies are using the windfall to shore up their balance sheets and generously reward shareholders. Marathon Oil strengthened its share buyback program and increased its quarterly dividend by 15% in May, marking its fifth dividend increase in about a year. Chevron is also repurchasing stock and increasing its dividend for the 35th consecutive year in early 2022.

When it comes to dividends, however, it’s hard to beat the kind of yield Devon Energy generates. Under Devon’s fixed and variable dividend policy, its total first-quarter dividend payout increased 27% sequentially to $1.27 per share. This is the highest dividend in the company’s history.

Devon even recently increased its fixed base annual dividend to $0.64 per share and could pay out at least $4 per share in variable dividends this year if WTI crude averages $100 a barrel.

Now what

The thesis of staying invested in these oil stocks is simple: as long as oil prices continue to rise, these companies will make huge amounts of money and return much of it to shareholders.

The OPEC Plus cartel has decided to increase oil production, but oil prices have ironically risen even more since OPEC’s announcement last week; WTI is hovering around $122.70 per barrel at the time of this writing.

What does this mean for shareholders? It will take a lot more for oil prices to cool anytime soon, which also means investors in Chevron, Marathon Oil and Devon Energy can continue to expect big numbers and enjoy the passive income they take in the biggest dividend checks these oil stocks send their way.


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Felix J. Dixon