The S&P 500(SNPINDEX: ^GSPC) is up 22.8% over the last year as megacap growth and value stocks have led the index to new heights. With valuations stretched in many top names, some investors may want to put new capital to work in out-of-favor companies.
The energy sector is chock-full of excellent dividend-paying value stocks -- especially in the upstream part of the industry.
Here's why three Motley Fool contributors believe Occidental Petroleum(NYSE: OXY), Diamondback Energy(NASDAQ: FANG), and Devon Energy(NYSE: DVN) are worth buying now.
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A bold bet in the oil patch
Daniel Foelber (Occidental Petroleum): Share prices of Occidental Petroleum, commonly known as Oxy, popped 4.4% on Wednesday in response to the exploration and production (E&P) company's fourth-quarter and full-year 2024 results. Even with the gain, the stock is still down over 15% in the last year.
The rebound may come as a surprise, given Oxy reported a net loss of $297 million in the quarter. But investors may have been expecting much worse given the stock was hovering around a three-year low before the print.
Oxy reported a $334 million asset impairment charge for its oil and gas segment, but cash flow for the overall business was solid, with $1.4 billion in free cash flow before working capital.
Oxy completed its near-term debt repayment target of $4.5 billion and announced a $1.2 billion divestiture for the first quarter of 2025. Oxy's $12 billion acquisition of CrownRock, which was completed on Aug. 1, 2024, boosted the company's oil and gas production portfolio and cash-flow potential, but it also added leverage to the balance sheet.
In its January 2024 investor presentation, Oxy said it expected $1 billion in FCF per year from CrownRock alone, assuming West Texas Intermediate (WTI) crude oil prices of $70 per barrel. It appeared like a conservative estimate at the time, but oil prices have been under pressure and are currently around $72 per barrel at the time of this writing.
Given its leverage, Oxy is a bit vulnerable to lower oil prices. The following chart shows how Oxy became dangerously overleveraged heading into the COVID-19 pandemic, which resulted in its stock price crashing into the single digits. But the company was able to pay down debt as the industry recovered.
However, its leverage and total net long-term debt has, once again, ticked up. It's a manageable level, and Oxy has a plan to pay down that debt rapidly. But it's still worth being aware of the company's exposure to lower oil and gas prices.
Oxy is a good buy for investors looking for an E&P around multiyear lows. Oxy can be a decent source of passive income as well.
In its latest quarterly release, the company announced a 9% increase to its quarterly dividend -- boosting the payout to $0.24 per share for a forward yield of 1.9%.
The dip is a buying opportunity in this oil and gas company
Lee Samaha (Diamondback Energy): It hasn't been a great year for oil and gas exploration and production companies, and Diamondback stock is down 10.7% over the last year. That said, the price of oil spent most of last year with a $70- or $80-a-barrel handle and never dipped below $65.
That kind of pricing is traditionally good for oil companies, and it's definitely good for Diamondback Energy's ability to pay its base dividend of $3.60 per share. Management estimates the break-even point to sustain the base dividend is $37 a barrel.
As such, it will take a pretty dramatic fall in the price of oil for Diamondback to cut its base dividend, and at any price above $37 a barrel, investors can start thinking about the company returning capital via its variable dividend or share buybacks.
For reference, Diamondback has a flexible strategy for returning capital outside of the base dividend. Management can buy back stock when the share price is low and increase the variable dividend when it rises. Either way, these strategies should support the share price or dividend yield.
Moreover, Wall Street analysts expect Diamondback will be gushing cash flow to return to investors in 2025, with the consensus estimate calling for $3.5 billion in free cash flow in 2024 and then $5 billion in 2025. The latter figure represents almost 11% of the current market cap, suggesting that Diamondback could pay a hefty dividend to investors next year, and making value-enhancing share buybacks. If the price of oil stays in the range it's been for the last year, then Diamondback looks like an excellent value opportunity.
February's a good time to show love for Devon Energy
Scott Levine (Devon Energy): With the S&P 500 rising about 23% over the past year, investors may find it challenging to identify quality dividend stocks headed in the other direction during this booming market. However, if they make their way to the oil patch, they'll find a great opportunity with Devon Energy stock and its 4.2% forward dividend yield. Shares of the upstream company have plunged over 13% over the past year, and today represent a great buying opportunity for investors looking for passive income.
While shares are down over the past year, prospective investors must recognize that the company hasn't suffered any major operating failures that underlie the stock's poor performance. Much of the stock's decline can be attributed to tumbling energy prices. For example, the price per barrel of benchmark West Texas Intermediate has fallen about 9% over the past year. Plus, Devon Energy decided not to declare a variable dividend in the third quarter due to lower commodity prices.
Tumbling energy prices may have dragged the stock down, but the company fortified its position as a leading upstream company in September when it closed on its acquisition of Grayson Mill Energy. The transaction strengthens its position in the Williston Basin with 307,000 net acres and 500 undrilled gross locations. And those circumspect about the company's financial well-being with the downturn of energy prices can rest easy with the company taking a conservative approach to leverage. At the end of the third quarter 2024, Devon Energy had a ratio of net debt to earnings before interest, taxes, depreciation, amortization, and exploration expense of 1.1.
Shares of Devon Energy may not be in screaming buy territory -- but maybe "loudly voiced" buy is more apt. Valued at 3.3 times operating cash flow, shares of Devon Energy are trading at a discount to their five-year average cash flow multiple of 4.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
