Ever since the crude run-up to $120 a barrel back in June, shares of most of the top energy stocks in the sector have traded lower. That could be set to change soon. Top Wall Street strategists feel that demand for energy stocks could explode, especially the companies that have adopted the variable dividend strategy. While concerns over demand and worries over recession remain in place, it is important to remember that the Organization of the Petroleum Exporting Countries (OPEC) is in the process of cutting production by a massive 2 million barrels per day.
One big reason portfolio managers are seeking out the top large-cap exploration and production leaders is they offer outstanding free cash flow potential. Free cash flow is the cash a company generates after taking into consideration cash outflows that support corporate operations and maintain its capital assets. That is, free cash flow is the money that is left over after a company pays for its operating expenses and all capital expenditures.
Three of the top exploration and production leaders are using variable dividend plans, wherein the company installs a set regular dividend, one that will be paid if oil prices decline, and then increases payments to shareholders when oil prices are higher. Shares of all three of these top companies are rated Buy across Wall Street, but it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Devon Energy
This may be one of the best value propositions in the sector, and it was one of the first to utilize a variable dividend strategy. 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.
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 (MLP) EnLink.
Devon Energy merged with WPX in early 2021 in an all-stock merger of equals. The combined company operates more than 5,100 wells in Oklahoma’s Delaware Basis, Eagle Ford Group and the two locations in the Rocky Mountains. As of late 2022, the company laid claim to 1.625 million barrels of reserves, including 44% petroleum, 27% natural gas liquids (NGLs) and 29% natural gas. Daily production was running in the range of 300,000 barrels per day in petroleum liquids, 125,000 barrels per day in NGLs and 920 million cubic feet of natural gas.
Investors receive a 9.11% dividend. Devon Energy stock is another top pick at Truist Financial, and its $115 target price is also a Wall Street high. The consensus target is much lower at $79.89. The stock closed almost 3% higher on Monday at $69.80.
Diamondback Energy
This red-hot energy play has backed up nicely but looks poised to press higher again. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company focused on the acquisition, development, exploration and exploitation of unconventional and onshore oil and natural gas reserves in the Permian Basin in West Texas and New Mexico.
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