Executives at the big oil companies got some hard-earned lessons over the past few years, especially in 2020 when oil plunged to negative levels as all of the storage was full and some traders and speculators took massive losses. These days the leaders at the C-suite level are focusing more on fixing balance sheets to increase free cash flow and then rewarding shareholders with what the Goldman Sachs team calls variable dividends.
In a new Goldman Sachs research report, not only do the analysts applaud the variable divide concept, but they are bullish on the companies that employ this strategy, or those getting ready to after years of being focused on production growth. The report noted this:
We have seen several exploration and production companies in our coverage adopt a variable dividend framework in which a percentage of excess free-cash-flow beyond base dividends is returned to shareholders. We believe a strategy for E&P return of cash that includes a codified variable dividend framework can be received favorably by investors given that it provides clear through the cycle alignment between producers and shareholders and ensures greater commitment to capital discipline, which we believe is crucial to increasing the investability of the sector more broadly.
Three Buy-rated stocks are mentioned in the report and look like tremendous buys now, especially with the analysts using $72 per barrel as the average benchmark price for West Texas Intermediate crude in 2022. However, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
This large-cap company offers strong value for investors. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids worldwide.
Conoco’s portfolio includes resource-rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; various international developments; and an inventory of conventional and unconventional exploration prospects.
Many Wall Street analysts feel Conoco can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, with visibility on future growth from a sizable position in the Permian. The Goldman Sachs team is very positive and noted that, while not actually using the variable dividend formula yet, the company is returning capital through a combination of fixed dividends and consistent share repurchases.
The company last week reported second-quarter 2021 adjusted earnings per share that comfortably beat the consensus forecast. Further, the figure significantly improved from an adjusted per-share loss a year ago. Goldman Sachs said this when discussing the stellar results:
Following a strong quarter, with earnings-per-share, production and cash flow coming in higher versus Goldman and Wall Street estimates, we continue to see substantial cash generation allowing for compelling shareholder returns and with return on capital employed inflecting to ~18% on average in 2023-2026 vs. the 10-year historical average of 8%.
Investors in ConocoPhillips stock receive a healthy 3.04% dividend. The Goldman Sachs price target for the stock is $68 a share, though the Wall Street consensus price target is higher at $73.86. The shares ended Friday’s trading at $56.50 apiece.
This stock may be offering one of the best value propositions among the Goldman Sachs picks. Devon Energy Corp. (NYSE: DVN) is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and natural gas liquids (NGLs) in the United States and Canada. It operates approximately 19,000 wells.
The company also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensate through its natural gas pipelines, plants and treatment facilities.
Production is weighted toward crude oil while growth opportunities are liquids focused, anchored by the Delaware Basin, SCOOP/STACK, Eagle Ford Shale, Canadian Oil Sands, and the Barnett. Devon also owns equity in the publicly traded midstream master limited partnership EnLink.
The company also posted strong results, and the analysts noted this:
Devon reported second quarter adjusted EPS/EBITDA of $0.60/$1.18 billion vs. our estimate of $0.52/$1.12 billion and Factset consensus of $0.52/$1.11 billion. Results were above our and consensus estimates driven by stronger production (2%/3% above Goldman Sachs and/consensus respectively) and better cash costs. Additionally, the company announced a second quarter dividend of $0.49/share (including a $0.38/share variable dividend) which was $0.11 per share above our expectations driven by stronger free-cash-flow generation.
The recurring dividend is 1.63%. Goldman Sachs has a price target of $37 for Devon Energy stock. The consensus target is $34.23, and the final trade for Friday hit the tape at $27.01.
Pioneer Natural Resources
Many Wall Street analysts love this stock as a pure crude oil play and, the company also is looking to employ variable dividends. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top-performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.
Pioneer is a huge player in the Permian Basin and in the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain a top player in the Permian, as it expects to deliver solid production growth in 2021 and beyond.
As of December 31, 2020, the company had proved undeveloped reserves and proved and developed non-producing reserves of 31 million barrels of oil, 17 million barrels of NGLs and 88 billion cubic feet of gas, and it owned interests in 11 gas-processing plants.
The company also posted outstanding results that beat the Goldman Sachs and Wall Street estimates and the analyst said this:
Pioneer updated its capital returns strategy in part due to current commodity prices, and plans to payout up to 75% of its excess free-cash-flow (versus 50% prior) after base dividend as variable dividend starting in the third quarter. With results, the company announced a $1.51 per share variable dividend on top of its base dividend of $0.56 per share or $2.07 per share of total dividend (5.8% annualized yield). We see potential for Pioneer’s total dividend to increase as its hedges roll-off — the company reported $0.6 billion (or ~$2.30 per share) in hedging losses during the quarter.
Pioneer Natural Resources stock investors receive a 2.10% dividend. The $196 Goldman Sachs price target is lower than the $208.27 consensus figure. The shares closed trading on Friday at $151.55 apiece.
These three top companies are rewarding shareholders in a way that is long overdue. With the potential for firm oil pricing the rest of 2021 and into next year, their stocks make sense for investors looking for energy positions that are great long-term holds.
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