The world’s tensions are oil companies’ profits, with rising crude prices poised to deliver a gusher of cash to investors in some of the industry’s biggest names. As military conflicts brew in the Middle East, domestic oil giants like Devon Energy, Diamondback Energy and ConocoPhillips have positioned themselves to pump out higher dividends from their swelling petrol profits.
The Tide Turns for Oil Majors
After years of investor ire over excessive spending and inadequate returns, the energy titans have pivoted to a new strategy – shoveling their growing cash hauls directly into shareholders’ pockets via payouts tied to commodity prices. It’s a formula that could mean bigger windfalls for those holding their stocks as tensions send oil benchmarks spiraling higher.
“We’re seeing a fundamental shift in how these companies approach capital allocation,” said Stewart Akerman, founding partner at Akerman Advisory Partners, an energy sector consultancy. “After decades of going for growth at all costs, they’ve course-corrected to prioritize returns to investors when prices are elevated. It’s exactly what the market has been clamoring for.”
For shareholders in Devon Energy, Diamondback and ConocoPhillips, it means each spike in crude quotations could quickly show up as an influx of variable dividends hitting their brokerage accounts.
The Devon Windfall
Leading the pack is Oklahoma City’s Devon Energy. The company pays a modest fixed quarterly dividend currently yielding 1.7%. But that base payout is just the start – Devon supplements it with a variable dividend that flexes up or down based on the cash flows it rakes in from its shale oil fields.
In 2022, when oil hovered around $95 per barrel, Devon’s variable payout added up to $3.42 per share for the year, data compiled by Bloomberg show. That was on top of its regular $0.88 annual dividend, bringing the total yield to a robust 9.6%.
This year has already brought even higher prices – West Texas Intermediate crude closed at around $81 per barrel on April 18th. Supply shortages stemming from the OPEC+ production cuts and escalating unrest in the Middle East could keep fueling rallies. The price spikes bode especially well for Devon’s variable dividends.
“With Devon’s unique dividend framework, our investors get to participate in the cashflow upside from periods of higher commodity prices,” said Rick Muncrief, Devon’s CEO, on the Q4 earnings call. “Our dividends really set us apart from other companies.”
For investors, it means holding steady through the oil volatility could bring outsized rewards. Devon’s variable dividend is reset quarterly, but the company is under no obligation to reduce the payout if prices dip temporarily. Shareholders essentially get to capture pricing peaks through inflated dividends, without suffering the same downside when crude inevitably retreats.
The Diamondback Buyout Boon
While trailing Devon, rival Permian producer Diamondback Energy has rolled out a similar blueprint for scoring windfall dividends from higher oil prices. The company grew its base quarterly payout by 7% in February and also rewards investors with variable dividends tied to its profit margins.
In 2022, those variable dividends totaled $6.05 per share, translating to a staggering 13.6% annualized yield when combined with the regular payout. For the first quarter of 2023, the variable dividend clocked in at $2.18 per share.
But Diamondback’s profit trajectory may get an even bigger boost from its pending $26 billion buyout of fellow Permian driller Endeavor Energy Resources. The combination will create a shale juggernaut pumping over half a million barrels per day from one of the world’s most prolific oil basins.
Analysts forecast the deal, slated to close by year-end, will drive double-digit growth in Diamondback’s cash flows per share in 2024 – even if prices remain flat versus today’s levels. Any continued escalation in the oil markets would amplify those gains, swelling the coffers available for dividends and share buybacks down the line.
“This deal is a absolute homerun for Diamondback shareholders,” said Rob Thummel, portfolio manager at energy investment firm Tortoise Capital. “They’ll get to reap the rewards both through increased variable payouts from the bump in cash flows, and from removing a key competitor and potential bidder for acreage in the Permian.”
The ConocoPhillips Bonanza
Rounding out the trio of dividend heavyweights is ConocoPhillips, the largest independent oil producer by market capitalization. While the company doesn’t use the “variable dividend” moniker, its cash return policy amounts to the same thing for investors.
Each year, ConocoPhillips sets a target for how much cash it intends to distribute to stockholders. It accomplishes this through a three-part program of regular quarterly dividends, supplemental “variable return of cash” (VROC) payouts, and share repurchases.
In 2022, ConocoPhillips aimed to return $15 billion to investors – a 50% increase over its original $10 billion plan as oil prices surged. It ended up disbursing $7.2 billion in dividend and VROC payments, while repurchasing $7.8 billion of its stock.
For 2023, the company initially budgeted a relatively conservative $9 billion investor payout, reflecting lower expected oil prices. But Russia’s production cuts and flaring tensions in the Middle East have prices spiking once again. If the energy crunch endures, ConocoPhillips would likely ramp up its VROC payouts and buybacks to siphon more of the bounty to shareholders.
“The higher commodity prices rise, the more cash flow ConocoPhillips will have available for their investor distributions,” said Justin Stevens, a Boston-based portfolio manager at energy-focused TSVC Capital. “Either in the form of variable return of cash payouts or stepped-up buybacks, shareholders reap the upside.”
No End in Sight for High Energy Prices
While the forces roiling global oil markets are a mixed bag, many experts suggest the inflationary pressures are unlikely to ease anytime soon. From Russia’s geopolitical machinations to the simmering unrest threatening key chokepoints in the Strait of Hormuz, a spate of looming supply shocks loom.
At the same time, years of underinvestment in new production have eroded spare capacity across the industry and made supply shortages increasingly acute as demand recovers. Even without a full-blown conflict, there’s little slack to offset any unexpected disruptions.
For energy investors, that volatility translates into a steady stream of payouts from the likes of Devon, Diamondback and ConocoPhillips. Their pioneering variable dividend models were crafted precisely to capitalize on oil’s upside cycles and shovel those windfalls back to stockholders.
As crude prices rip higher, those dividends will too.
“There’s no going back now,” said Stevens. “After years of disappointing shareholders, these companies have learned their lesson. When oil prices are elevated, that cash has got to go straight into investors’ pockets – period.”
