Pioneer and Devon were early proponents of a popular new dividend strategy.
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Investors used to evaluate energy companies on how quickly they were growing their oil and gas production. These days, they look much more closely at another metric—free cash flow.
Oil and gas producers have shifted their business models to prioritize profitability so that they can return more cash to shareholders as dividends or buybacks.
Investors have urged the companies to maintain a disciplined approach to capital expenditures. Every oil boom has eventually been followed by a bust, and companies that took on too much debt during the good times tend to regret it during the downturn.
Now, almost all public oil-and-gas companies are adhering to the new philosophy and it has helped their stocks and financial results as oil prices rise. The Energy Select Sector SPDR Fund (ticker: XLE) is up 59% in the past year.
In the latest quarter, almost every energy company in the S&P 500 grew free cash flow on a year-over-year basis, as oil and gas prices have hit multiyear highs. Many, however, have started to see their free cash flow flatten out or even decline on a quarter-over-quarter basis.
For some, this is just a quirk of the calendar. Oil services company Schlumberger (SLB), for instance, reported negative free cash flow in the latest quarter, largely because it invests heavily in its business at the start of the year, and sees those investments pay off in the following months. In addition, several companies say they are starting to get hit by inflation, as it gets costlier to drill wells and buy the materials for production.
A few energy companies in the S&P 500, however, are outpacing the field in terms of free cash flow production. The four below grew their free cash flow by more than 10% in the latest quarter above the prior quarter.
Oil and Gas Outperformers
Energy stocks that grew free cash flow the most in the latest quarter
| Symbol | Name | Closing Price | Price Change YTD | Market Value ($B) | Percent Increase In FCF* |
|---|---|---|---|---|---|
| CTRA | Coterra Energy | $30.69 | 62% | 25 | 54% |
| PXD | Pioneer Natural Resources | 266.48 | 47 | 65 | 31 |
| DVN | Devon Energy | 69.92 | 59 | 46 | 22 |
| FANG | Diamondback Energy | 130.28 | 21 | 23 | 11 |
*Latest quarter over the prior quarter
Source: Factset
Coterra (CTRA) is a natural gas producer based in Houston that was formed last year from the merger of Cabot Oil & Gas and Cimarex Energy. Coterra is now one of the largest gas producers in the U.S., and has benefited from gas hitting its highest levels in more than a decade. One reason gas is rising is that the U.S. is shipping more to Europe as countries there attempt to transition away from Russian gas.
Pioneer Natural Resources (PXD), Devon Energy (DVN), and Diamondback Energy (FANG) are all oil producers that have prioritized cash flow in the past couple of years.
Pioneer and Devon were early proponents of a new dividend strategy that has now become popular among more energy companies. They offer investors base dividends that are relatively small, but add variable dividends to the payout each quarter depending on their cash flow and other metrics.
The strategy allows them to give shareholders large and relatively predictable payouts when times are good without risking the possibility of having to make major cuts when times are bad.
Diamondback has also instituted a variable dividend now. In the latest quarter, it paid out a total dividend that would give it a 9.7% dividend yield on an annualized basis.
Write to Avi Salzman at [email protected]
