Energy stocks were the place to be in 2022, and many Wall Street analysts think their outperformance will persist well into the future.
So let’s have a look at three hydrocarbon energy stocks that boast tempting dividend yields and attractive valuations: ExxonMobil (XOM 0.69%), Pioneer Natural Resources (PXD), and Coterra Energy (CTRA -1.90%).
Granted, it’s possible to find energy companies that pay larger dividends than ExxonMobil. But when it comes to consistency, few can compete with Exxon.
This fully integrated oil and gas juggernaut has increased its dividend each year dating back to 1981. Its forward dividend yield currently stands at 3.2% — which is pretty good.
Moreover, the company has some macroeconomic winds at its back. China continues to reopen its economy as it reels in pandemic restrictions. Underproduction in the energy industry has kept oil and gas prices high. Finally, drawdowns in the U.S. Strategic Petroleum Reserve have now halted. It’s possible the Biden administration could seek to refill the SPR in 2023, which would put upward pressure on oil prices.
On a company-specific level, Exxon has paid down debt to shore up its balance sheet and ensure it can continue hiking its dividend for years to come. After spiking above $60 billion in 2020, Exxon’s net debt is now under $12 billion.
XOM Net Financial Debt (Quarterly) data by YCharts
As for its valuation, the company has an attractive forward price-to-earnings ratio of 10, lower than at the end of 2021. To me, that all adds up to a fantastic option for those looking for a balance of passive income and stability.
Pioneer Natural Resources
For investors seeking massive dividend payments, Pioneer Natural Resources is a natural fit. With a dividend yield of 10.7%, Pioneer offers a truly mouth-watering income stream.
Indeed, Pioneer’s management makes it clear that returning cash to shareholders is its top priority. The company returned over $7.5 billion to its shareholders in 2022 through a combination of dividends and share buybacks.
Supporting these impressive figures is a veritable river of free cash flow.
With a free cash flow yield of over 12%, Pioneer generates $28.25 per share in free cash flow. The company uses a base-plus-variable dividend model. This means the company can pay out higher dividends when oil and gas prices are high, and scale them back when prices — and free cash flow — falls. This variable dividend model is a great way for energy companies to maximize shareholder returns. However, investors should be aware: Pioneer’s gaudy dividend yield will fall if oil and gas prices crash.
Turning to valuation, Pioneer sports an 8.5 times forward price-to-earnings ratio — more or less in line with its peers. However, for investors looking for giant dividends — that could grow even higher if oil prices surge again — Pioneer is a name to remember.
My third pick is Coterra Energy. Like Pioneer, Coterra pays a hefty variable dividend; however, with a forward P/E of 6, Coterra is one of the cheapest companies in the S&P 500.
An oil and gas exploration company, Coterra operates across the Permian basin (West Texas), Anadarko basin (Oklahoma), and Marcellus shale (Pennsylvania). However, Coterra’s product mix sets it apart from its industry peers. About three-quarters (72%) of Coterra’s revenue comes from the sale of natural gas or natural gas liquids.
Similar to Pioneer, Coterra uses a variable dividend structure that includes a base dividend along with a variable dividend pegged to the company’s overall free cash flow. Over the past 12 months, Coterra has a trailing dividend yield of 8.4%, not the highest in the industry, but still outstanding. Granted, potential investors should note that natural gas prices have fallen significantly over the last six months, which could affect Coterra’s variable dividend should the company’s free cash flow fall.
In addition to the variable dividend, Coterra is nearing the completion of a $1.25 billion share-buyback program, which may be renewed or enlarged when the company announces earnings results on Feb. 23. With a market cap of $19.5 billion, the current share repurchase program is significant. A future program of similar or larger size would help support Cottera’s share price.
I think Coterra offers income investors several benefits. Its dividend delivers plenty of cash to investors, while its product mix offers some diversification for investors who may already hold oil-heavy producers. Like ExxonMobil and Pioneer Natural Resources, Coterra is a stock that passive income investors can rely on for years to come.