Warren Buffett is increasingly bullish on the oil market. His company, Berkshire Hathawaynow holds $25.9 billion worth of Chevron (CLC 2.67%), a fivefold increase from its holdings at the end of 2021. Chevron is now Berkshire’s fourth-largest stock holding. Buffett also owns a significant stake in western oil after buying $7 billion worth of shares last month to complete its legacy investment in the oil giant. Buffett’s oil bet is now over $40 billion.
Clearly, Buffett is bullish on the oil market, fueled by the recent surge in crude prices above $100 a barrel. While investors could follow his lead and buy shares of Chevron or Occidental, there are several other compelling ways to invest in the oil sector. Three oil stocks our energy contributors think investors should consider are Magellan Midstream (MPM 0.39%), Pioneer of natural resources (PXD 5.34%)and Devon Energy (DVN 3.78%).
Happily stuck in the middle
Reuben Gregg Brewer (Magellan Midstream Partners): Chevron is a well-run oil company with a diversified business, but its revenues and results are still heavily impacted by ups and downs in energy prices. Fear of commodity volatility, however, should not prevent you from investing in oil; you just need to get the right one in your wallet. The Magellan Midstream Master Limited Partnership is a good choice to consider.
Although Magellan does not drill for oil, about 25% of its business comes from pipelines and storage assets that help transport oil across the country. The remaining 75% of unit operating margin is driven by midstream assets that process refined products, such as gasoline and jet fuel. Magellan’s business is directly oil-related, with all but 9% of the partnership’s operating margin coming from reliable and recurring royalties.
And cash flow from Magellan’s high-paying oil business supports a strong distribution yield of 8.5%. This distribution is covered by the distributable cash flow of approximately 1.2 times. Meanwhile, Magellan has long focused on keeping its debt levels near the low end of its peer group. So there’s significant security here for income investors, evidenced by the partnership’s two decades of annual increases in distributions. In other words, it is an oil investment with a well-sustained high return but without the commodity risk.
Dividends from oil
Matt DiLallo (Pioneer of Natural Resources): Bullish oil price investors like Buffett should consider Pioneer Natural Resources. Thanks to its dividend framework, it allows investors to profit immediately from rising oil prices.
Like many companies, Pioneer Natural Resources pays a fixed quarterly dividend. At the current share price in the $250 range, Pioneer’s quarterly payout of $0.78 per share ($3.12 per share annualized) yields 1.2%, which is slightly lower than the S&P500is currently 1.5% dividend yield.
In addition to this fixed quarterly cash distribution, Pioneer Natural Resources pays a variable dividend of up to 75% of its quarterly free cash flow. Thanks to soaring crude prices, it’s paying a ton of dividends these days. It recently declared a variable dividend of $6.60 per share for the second quarter, bringing its total payout to $7.38 per share. This implies a mind-blowing annualized dividend yield of 13%. That payout is nearly double the $3.78 per share it paid in the first quarter, bringing its total dividend payout to $11.16 per share this year. Pioneer could pay more than $20 per share in dividends this year, given the current crude price situation.
Pioneer Natural Resources returns additional cash to shareholders through its share buyback program. It repurchased $250 million worth of stock during the first quarter. That pushed its total capital return to $2 billion, or 88% of its free cash flow in the first quarter.
Pioneer Natural Resources allows investors to take immediate advantage of rising oil prices. This makes it an intriguing option for those who want to earn an income by following Buffett around the oil patch.
Want to make money off high oil prices? This action is for you
Neha Chamaria (Devon Energy): I see two reasons why Buffett is doubling his Chevron shares: rising oil prices and dividends. While the former should benefit most oil companies, not all pay large, steady, and growing dividends like Chevron. Buffett loves dividends, and if you do too, another oil stock you’ll want to watch right away is Devon Energy.
Devon has a strong portfolio of assets mostly in the Delaware Basin, and it’s absolutely overwhelming when it comes to dividends. That’s thanks to its fixed and variable dividend policy, which is making a lot of money for investors amid rising oil prices. Devon recently increased its fixed quarterly dividend by 45% to $0.16 per share. On top of that, the company pays up to 50% of its excess free cash flow in variable dividends every quarter.
Devon’s free cash flow is rising rapidly in line with oil prices, as is its dividend payout. For example, Devon just announced a total dividend of $1.27 per share for its first quarter. This is a record payout for the company, and is driven by the record free cash flow Devon generated in the first quarter.
Given the strength in oil prices, Devon expects to pay out more than $4.75 in dividends per share this year, representing dramatic growth from its total payout of $1.97 per share in 2021. company also has an ongoing share buyback program, which speaks to Devon’s focus on shareholder return. With the company also aggressively reducing debt with the extra cash flow it gets from higher oil prices, the 6.2% yielding Devon is an irresistible oil stock you’ll want to consider.