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.
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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.
ConocoPhillips
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.
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