Oil Stock Dividends

Brit Ryle

Posted March 4, 2024

Buy Back, Baby, Buy Back

The U.S. set a record for oil production in 2023, averaging more than 13 million barrels a day. As investors, we tend to rely on the formula: more sales equals more revenue and profit equals higher stock price…

That formula failed pretty dramatically for American oil companies.

Even though West Texas Intermediate prices averaged $77 and Saudi Arabia continues to curtail its production, American oil stocks did not have a very good year. In fact, it was a pretty bad year for oil investors. At least compared to the S&P 500…

Over the last year, the S&P 500 is up 34%. Exxon-Mobil (NYSE: XOM) was down 7%. Occidental (NYSE: OXY) was Flat. Chevron (NYSE: CVX) dropped  6%, and Devon Energy (NYSE: DVN) fell 21%…

The underperformance looks even worse when you consider that each of these companies also produces natural gas, and the U.S. became the biggest producer of natural gas, as well as the biggest exporter of liquified natural gas (LNG) in the world in 2023…

There are a couple of things at play here. One, the world has plenty of oil. Shale technology as well as a massive recent discovery in Guyana/Suriname, and Brazil’s output increase plans are flooding the world in black gold.  Saudi Arabia has had to cut its production by ~2 million barrels a day to keep prices where they are. And over the weekend, the Saudis said they’d extend their production cuts until June. 

Second, global demand growth for oil is not particularly strong. Goldman Sachs forecasts demand growth to 1.5%. With the world consuming 100 million barrels of oil a day, demand will grow less than what the Saudis have already cut. 

China accounted for 75% of global demand growth in 2023. However the economic outlook for China is bad, and China’s oil demand growth is expected to return to 2019 levels over the next 18 months or so.

Now, obviously, we’re not talking about the death of oil here. Fossil fuels will be an indispensable part of the world’s energy mix for decades. 

But with supply demand pretty well balanced, what do you do if you’re running a U.S. oil company? How do you create value for shareholders?

Drill, Baby, Drill? Or Buy, Baby, Buy?

Former President Trump is campaigning on Drill, baby, drill. President Biden says oil companies should increase refining capacity. They’re both wrong. 

Unless you really want to pursue ESG goals, an oil company’s job is not to raise production and push prices lower so Americans get a price break at the pump. 

Any public company’s primary responsibility is to its investors – the shareholders. People invest to make money. And since oil companies can’t get their stock prices higher by increasing production, they are turning to dividends and share buybacks to increase the shareholder value – also known as “getting the stock prices higher.”

On January 25, Chevron announced a whopping $75 billion share buyback that could take 20% of its stock out of circulation. 

Exxon spent $35 billion on share buybacks and plans to spend another $35 billion this year.

Last week, Devon Energy said it would spend 70% of its free cash flow on share buybacks and dividends. Devon currently yields nearly 6%, not too shabby. And with a forward P/E ratio of 7, the stock is cheap. 

It’s difficult to forecast much upside for oil stocks like Devon Energy, but the stock is cheap enough that the 6% yield should be pretty safe. 

Briton Ryle

Chief Investment Strategist
Pro Trader Today
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