top 3 oil stocks for profit
Saudi Arabia is leading a concerted effort to remove one million barrels per day (BPD) from the world's oil supply. The unexpected move sent oil prices soaring, pushing them back above $80 a barrel. According to reports, the move is in response to the US government's decision not to begin replenishing its strategic oil reserves this year. The move could push oil prices higher in the coming months, when demand recovers. This will increase the cash flow in the oil industry. The prospect of even higher prices makes Devon Energy (NYSE: DVN ), Diamondback Energy (NASDAQ: FANG ), and Pioneer Natural Resources (NYSE: PXD ) look like major oil stocks to buy as they plan to sell more of their oil. bring back - Paying cash to shareholders this year.
Dual catalysts
Saudi Arabia revealed this week that it will voluntarily cut its production by 500,000 BPD from May until the end of the year. Meanwhile, Russia is going along with its 500,000 BPD cut that began last month through the end of this year. These moves will remove significant supply from the market, as demand continues to accelerate. According to the International Energy Agency's (IEA) March Oil Market Report, "Global oil demand growth will accelerate sharply during 2023, from 710,000 BPD in 1Q23 to 2.6 million BPD in 4Q23." The idea is "the recovery of air traffic and therefore, the IEA expects that in the second half of the year the supply will be less than the demand. The reduction of Saudi and Russian production will make this situation worse.
Cashing in on the situation
The supply and demand picture has led oil market analysts to raise their forecasts for oil prices. For example, Goldman Sachs raised its year-end forecast for Brent oil (the global price index) by $5 to $95 a barrel. Meanwhile, the investment bank now expects Brent to reach $100 a barrel by the end of next year, $3 a barrel higher than its previous forecast. This forecast bodes well for top US producers and their investors as it should improve their cash flow and returns. For example, Diamondback Energy's free cash flow will increase significantly with oil prices:
Higher cash flow from the oil company will benefit investors as the company plans to return 75% of free cash flow to shareholders through dividends and buybacks. Therefore, cash yields will rise with crude prices. Diamondback may pay a significant variable dividend in addition to its base payment. It can buy back more of its stock at attractive prices (a 10% free cash flow yield at $80 oil is double that of the S&P 500, suggesting it is significantly undervalued).
Pioneer Natural Resources plans to return almost all of its free cash flow to investors, including paying 75% through its variable dividend. At $80 oil, Pioneer could generate enough cash to pay $20 a share this year, yielding nearly 9.5% at the latest share price. Meanwhile, the dividend could rise to around $28 per share of 100 oil, which would push the yield into double digits.
Devon Energy also expects to return a significant portion of its oil-driven free cash flow to shareholders this year. It pays a basic dividend of up to half of free cash flow to shareholders through a variable dividend. While this payment has decreased in recent quarters, it may see a new increase following Saudi Arabia's move to raise prices. Meanwhile, Dion can use its remaining cash to buy back its cheap shares (it trades at an 8% free cash flow yield on $80 oil).
Higher oil prices hint at bigger oil-fueled dividends from this trio
Devon Energy, Diamondback Energy and Pioneer Natural Resources are all set to benefit from Saudi Arabia's move to raise oil prices as it should bolster their free cash flow. This will give them more money to return to shareholders, including the potential for much higher interest payments. Add that income to the potential upside in their share prices, and they could generate strong total earnings in the coming months. This gives them huge oil reserves to buy for those who want to cash in on Saudi Arabia's bid to raise oil prices.
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