Key Points
Chord Energy has a three-tiered capital return framework that includes paying variable dividends.
Diamondback Energy aims to return at least 50% of its cash flow to shareholders through its base dividend, share repurchases, and variable dividends.
EOG Resources returns all its free cash flow to shareholders through its regular dividend, share repurchases, and special dividends.
Oil prices have spiked this year due to the war with Iran. Brent, the global oil price benchmark, was recently around $95 a barrel. That's a $35 premium to its price point at the beginning of the year.
Oil companies are cashing in on this premium by generating windfall profits. Several oil stocks are returning a portion of this cash to their shareholders through dividends. Here are some notable dividend oil stocks that are likely to pass on excess profits to shareholders through higher dividends.
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Following the framework
Chord Energy(NASDAQ: CHRD) has built a premier position in the oil-rich Williston Basin of North Dakota and Montana. Its large-scale operations in the region enable it to generate lots of cash, even at lower oil prices. Meanwhile, its strong balance sheet enables Chord Energy to return the bulk of its cash flow to shareholders.
The oil company has a tiered return of capital framework. If its leverage ratio is above 1.0 times, it pays its base dividend ($5.20 per share annually) and retains the remaining cash to strengthen its financial profile. Once its leverage ratio dips below 1.0x, Chord returns more than 50% of its adjusted free cash flow to shareholders via its base dividend and a combination of share repurchases and variable dividend payments to reach its targeted payout level. Chord will return more than 75% of its adjusted free cash flow when its leverage ratio is below 0.5x.
During the fourth quarter, Chord had a 0.6x leverage ratio, enabling it to return 48% of its adjusted free cash flow to investors via its base dividend and share repurchases. Given the surge in crude prices, Chord will likely return even more money to investors in the coming quarters, probably through a combination of share repurchases and variable dividend payments.
More to allocate according to the framework
Diamondback Energy(NASDAQ: FANG) has built a leading position in the world-class Permian Basin of Texas and New Mexico. Its low-cost operations generate significant cash. At $50 oil, Diamondback can generate $3.1 billion of free cash flow, and more than double that total at $80 oil.
The oil company has committed to returning at least 50% of its quarterly adjusted free cash flow to shareholders through a combination of its base dividend, share repurchases, and variable dividends. It returned 62% of its free cash flow to investors during the fourth quarter, paying its $300 million base dividend and repurchasing $434 million of its shares.
Higher oil prices will enable Diamondback Energy to generate a massive gusher of free cash flow this year. The company will return at least half that money to shareholders, likely through a higher base dividend, share repurchases, and potentially variable dividend payments.
The potential to pay something special
EOG Resources(NYSE: EOG) has a diversified portfolio of low-cost oil and gas resource positions across the U.S. The company can generate a direct after-tax rate of return of more than 100% on new wells drilled at $55 oil. EOG is on track to produce a huge gusher of free cash flow this year, given the surge in crude prices.
With one of the best balance sheets in the oil patch, EOG Resources has been returning 100% of its free cash flow to shareholders. It does that through a growing base dividend, share repurchases, and special dividends.
EOG's current base dividend level is $2.2 billion, less than half the free cash flow it expected to generate this year ($4.5 billion at a low $60 oil price). With crude now much higher, EOG will produce more cash to return to shareholders. I expect it to return that windfall through a combination of share repurchases and special dividend payments.
Oil-fueled dividend payments
Most oil companies pay a fixed quarterly dividend and return any excess cash to shareholders by repurchasing stock. Chord Energy, Diamondback Energy, and EOG Resources aim even higher, targeting to return a meaningful percentage of their free cash flow to investors, including the potential for additional variable and special dividend payments. As a result, these dividend stocks will likely pass on a portion of the premium they're currently earning on their oil production to shareholders in the form of additional dividend payments this year.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends EOG Resources. The Motley Fool has a disclosure policy.
