The oil-producing cartel, OPEC, is finally paying attention to calls from Western nations to increase production and help cool the warming of the oil market.
Brent crude, a world leader in oil prices, jumped to a nearly 13-year high of about $ 139 a barrel in March as Russia’s war in Ukraine threatened to further disrupt oil supplies in an already tight energy market. Although Brent crude fell below $ 100 a barrel in mid-April, it has since recovered and hovered around $ 121 a barrel as of Friday afternoon.
So far, OPEC has barely moved. The cartel, which produces almost 40% of the world’s crude supply, decided to increase its monthly oil production by 432,000 barrels a day in May, a slight increase from the 400,000 barrels a day it had been adding every month since August 2021. .
The pace is about to change, though. OPEC Plus, a group that includes 13 OPEC members plus 10 other prominent oil-producing nations, agreed on Thursday to increase monthly production by 648,000 barrels a day in July and August.
Image source: Getty Images.
While OPEC says it made the decision in anticipation of higher demand as economies around the world reopen after the blockade of COVID-19, another factor seems to have been the fear of a recession fueled in part by soaring oil prices and falling Russian oil production in recent months. Russia is the world’s third largest oil producer, behind the United States and Saudi Arabia, and both Russia and Saudi Arabia are members of OPEC +.
What does the OPEC movement mean for investors in oil stocks?
OPEC’s decision to increase production is undeniably important, and is expected to curb the seemingly unstoppable rise in world oil prices that has boosted inflation and increased the likelihood of an economic slowdown.
The fall in oil prices, however, could also put an end to the recent recovery in oil stocks. Oil stocks tend to move at the same time as oil prices, as higher crude oil prices mean more profits for oil producers, and vice versa.
However, there is something important to highlight here.
From the rise in oil prices on Thursday, which came despite OPEC’s announcement that production would increase, it seems that the market believes that these incremental increases may not be enough to meet demand, especially during the high season of summer travel.
This argument holds, as most OPEC + members are already struggling to meet their existing quotas, leaving them with little capacity to further increase production. Oilprice.com estimates that only Saudi Arabia, the United Arab Emirates and Iraq can have spare capacity.
Oil markets, however, could be unpredictable and oil prices could still fall, a fact that could cause panic sales in oil stocks. If that happens, long-term investors should look for opportunities to pick up stocks from the best oil companies. ExxonMobil (XOM 1.45%) and Devon Energy (DVN 0.93%) are two of these actions to put on your radar.
You can trust this dividend even if oil falls 50%
ExxonMobil is one of the largest fully integrated oil companies in the world, operating across the oil and natural gas business. However, the upstream activity (exploration and production) accounted for almost 68% of its cash flow from operations last year, so ExxonMobil’s profitability depends largely on oil prices.
The energy giant has significantly reduced its production cost in recent years, bringing its equilibrium price of oil to just $ 41 a barrel by 2021. In other words, at a price of Brent crude oil $ 41 a barrel, ExxonMobil could generate enough cash flow to cover its capital expenditures and dividend. In 2027, ExxonMobil expects its oil price to drop to just $ 30 a barrel.
ExxonMobil is also a dividend aristocrat, having increased its pay annually for 39 consecutive years, and at Friday’s stock price, its yield is 3.6%. This means that even if oil prices were somehow down to around $ 37 a barrel, you could still get a bigger dividend check from ExxonMobil. There’s nothing better than earning a steady passive income during tough times, which is one more reason why you’d want to buy this oil if it falls.
This 6.7% yield seems safe at the moment
Devon Energy is an exploration and production company and therefore has a high exposure to oil prices. But it has become one of the most compelling dividend stocks in the oil and gas industry in recent months, thanks to the management of the fixed-plus-variable dividend policy launched last year.
Each quarter, in addition to its fixed “base” dividend, Devon pays a variable dividend of up to 50% of the excess free cash flow it has left after financing the base dividend and capital expenditures. Here’s how much passive income it turned out to be.
Year Fixed base Dividend per share Variable dividend per share Total dividend per share 2019 0.35 $ NA 0.35 $ 2020 0.68 $ NA 0.68 $ 2021 0.44 $ 1.53 $ 1.97 $
By 2022, Devon has already raised its annual fixed dividend to $ 0.64 per share, and could end up paying a variable dividend of more than $ 4 per share if West Texas Intermediate crude, the U.S. benchmark for oil, it averages $ 100 a barrel (it was about $ 120 on Friday).
Of course, Devon’s variable dividend will fall if oil prices do. However, the company has a solid balance sheet, prioritizes dividends and is also repurchasing shares. Reducing the number of outstanding shares should increase the payment of dividends per share even in an environment of lower oil prices. At Friday’s stock price, the payment offers a significant return of 6.7%, and this could only increase if the stock price falls. With all that going on for Devon Energy, it’s clearly a dividend stock that you might want to buy in any fall.