The energy sector has been hot in 2024. However, oil prices have remained stalled and profits for major players have been decent, but not incredible.
Investors looking for strong companies in the energy sector that will also benefit from rising oil prices might consider ExxonMobil (NYSE:XOM), Baker Hughes (NASDAQ:BKR)And EOG Resources (NYSE:EOG). Here’s why the three dividend stocks are worth buying now.
Rising oil prices and production could lead to higher profits for ExxonMobil
Daniel Foelber (ExxonMobil): ExxonMobil stock fell 2.8% on April 26 after releasing a report. drop in profits. Despite this, the stock remains up sharply over the year and is hovering around a record level.
Profits were $8.2 billion, 28% lower than the first quarter of 2023, which is a bit surprising given the strength and remarkable stability of oil prices. However, if we dig deeper, the main problem is not the upstream activity, but the downstream activity.
Exxon’s refining margins have fallen and its energy products business has been weighed down by maintenance schedules and facility expansion plans. The energy products segment reported a profit $2.8 billion lower than in the first quarter of 2023.
Although Exxon makes the majority of its profits upstream, its downstream segment is an integral part of the broader investment thesis. In the first quarter of 2023, downstream accounted for more than a third of total profits. This is an overall advantage and adds some diversification for the integrated major. However, the refining sector may perform poorly while the upstream sector performs well.
Despite the downstream slump, Exxon is still posting strong results that support growth in its fossil fuel business, as well as low-carbon projects in carbon capture, hydrogen, and more. If oil hits $100, Exxon would benefit massively. Its production should increase once the integration of Pioneering natural resources (probably later this year) and continues to increase production off the coast of Guyana.
Exxon is a balanced buy in the oil sector as it has an impeccable balance sheet, low production costs, diversified businesses and a clear roadmap for mid- to long-term growth. With a yield of 3.2%, Exxon is an attractive dividend stock for those looking to generate passive income and play on rising oil prices.
Baker Hughes is more than just oil
Lee Samaha (Baker Hughes): The latest first quarter earnings report is an excellent time to take stock of Baker Hughes, an oil and gas equipment and services company. A relatively high oil price will boost oil-related capital investments. This is good news for the company’s Oilfield Services and Equipment (OFSE) segment, which could provide stable support for its growth targets in its Industrial and Energy Technologies (IET) segment.
In fact, management is seeing a slow and steady increase in upstream oil capital spending. The combination of disciplined investment (from the oil majors) and relatively high prices supports a compound annual growth rate of 2% from 2023 to 2030.
This would prove useful as the company grows its IET revenue, particularly with orders for liquefied natural gas (LNG) and clean energy technologies. Natural gas and LNG are considered ideal transition fuels as the world slowly moves toward renewable energy sources.
Although its Q1 IET orders did not reach the record levels of Q1 2023 ($2.9 billion vs. $3.5 billion), the book-to-bill ratio is still one. Meanwhile, its remaining performance obligations increased to $29.3 billion, from $26.5 billion in the same quarter of 2023.
Trading at 16.2 times estimated 2024 earnings and currently trading with a dividend yield of 2.5%, Baker Hughes is a good option for income-seeking investors.
EOG Resources is currently a great choice for income and value investors.
Scott Levine (EOG Resources): While some companies fear rising energy prices, those operating exploration and production (E&P) businesses like EOG Resources are generally eager to see the price of crude oil rise. And for investors, it could be a harbinger of higher distributions – or at the very least better financial health of companies.
It’s not just the fact that the price of crude oil is rising slightly that makes EOG Resources shares and its forecast dividend of 2.7% attractive. Another important characteristic is that EOG is little valued, which makes it a good way to build up your portfolio.
Illustrating how rising crude oil prices can be beneficial for the company, EOG Resources imagines two scenarios. In a three-year future, from 2024 to 2026, where the West Texas Intermediate (WTI) benchmark averages $65 per barrel (and the Henry Hub price averages $3.25 MMBtu), EOG Resources expects it to generate $12 billion in cumulative free cash flow.
On the other hand, if WTI averaged $85 per barrel (with Henry Hub remaining at 3.25 MMBtu), EOG Resources estimates cumulative free cash flow at $22 billion for 2024 through 2026.
For those more concerned about the immediate future, consider the company’s outlook for 2024. If WTI averaged $75 per barrel (and Henry Hub averaged 2.50 MMBtu), EOG Resources would ‘expects to generate free cash flow of $4.8 billion, of which the company expects to return free cash flow of $4.8 billion. $2.1 billion in dividends and $1.3 billion in stock buybacks and/or special dividends.
With shares currently changing hands at around 10.4 times earnings – a reduction from their five-year average price-to-earnings ratio of 13 – now seems ideal timing for investors in the energy to power their passive income streams with EOG Resources.
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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 posts and recommends EOG Resources. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.
3 Energy Dividend Stocks That Will Thrive at $100 a Barrel Crude Oil was originally published by The Motley Fool
