OOPEC, a low-producing cartel, finally responds to calls from Western countries to increase its production and help cool the overheated oil market.
Brent crude – the global benchmark for oil prices – hit a nearly 13-year high of around $139 a barrel in March as Russia’s war in Ukraine threatened to further disrupt supply in oil in an already tight energy market. Although Brent crude fell below $100 a barrel in mid-April, it has since rebounded and hovered around $121 a barrel on Friday afternoon.
So far, OPEC has barely moved. The cartel, which produces nearly 40% of the world’s crude oil supply, decided to increase monthly oil production by 432,000 barrels per day in May, a slight increase from the 400,000 barrels per day that it had been adding every month since August 2021.
The pace is about to change, however. OPEC Plus – a group that includes all 13 OPEC members plus 10 other notable oil-producing nations – agreed on Thursday to increase monthly production by 648,000 barrels a day in July and August.
Although OPEC says it made the decision in anticipation of higher demand as economies around the world reopen from their COVID-19 lockdowns, it seems another factor was fears of a partly fueled recession. by skyrocketing oil prices and declining 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 OPEC’s decision mean for investors in oil stocks?
OPEC’s decision to increase production is undeniably important and should put an end to the seemingly unstoppable rise in global oil prices that has fueled inflation and increased the likelihood of an economic slowdown.
However, lower oil prices could also put an end to the recent recovery in oil stocks. Oil inventories tend to move in parallel with oil prices, as higher crude prices mean more profits for oil producers, and vice versa.
However, there is something important to note here.
Based on Thursday’s oil price hike – which came despite OPEC’s announcement of a production increase – it appears the market thinks those additional increases may not be enough to meet. on demand, especially during the peak summer travel season.
This argument holds water given that most OPEC+ members are already struggling to meet their existing quotas, leaving them with little capacity to increase production further. Oilprice.com estimates that only Saudi Arabia, the United Arab Emirates and Iraq may have spare capacity.
Oil markets, however, can be unpredictable and oil prices could fall further – an event that could trigger panic selling in oil stocks. If this happens, long-term investors should look for opportunities to acquire stocks of top companies in the oil industry. ExxonMobil (NYSE: XOM) and Devon Energy (NYSE:DVN) are two such stocks to put on your radar.
You can count on this dividend even if oil falls by 50%
ExxonMobil is one of the world’s largest fully integrated oil companies, operating across the full spectrum of oil and natural gas activities. However, upstream activity – exploration and production – generated nearly 68% of its operating cash flow last year, so ExxonMobil’s profitability is highly dependent on oil prices.
The energy giant has significantly reduced its production costs in recent years, bringing its breakeven price of oil to just $41 a barrel in 2021. In other words, at a Brent crude price of $41 a barrel, ExxonMobil could generate enough cash flow to cover its capital expenditures and dividend. By 2027, ExxonMobil expects its breakeven oil price to drop to just $30 a barrel.
ExxonMobil is also a Dividend Aristocrat, having increased its payout every year for 39 consecutive years now, and in Friday’s stock price, its payout returns 3.6%. This means that even if oil prices were to fall somehow to around $37 a barrel, you could still get a bigger dividend check from ExxonMobil. There’s nothing better than earning a stable passive income during tough times, which is all the more reason why you would want to buy this stock of oil if it goes down.
This 6.7% return seems safe for now
Devon Energy is an exploration and production company and is therefore highly exposed to oil prices. But it has become one of the oil and gas industry’s most compelling dividend stocks in recent months, thanks to the fixed and variable dividend management policy initiated last year.
Each quarter, in addition to its fixed “base” dividend, Devon pays a variable dividend of up to 50% of excess free cash flow after funding the base dividend and capital expenditures. Here’s how much passive income it turned out to be.
|Year||Basic fixed dividend per share||Variable dividend per share||Total dividend per share|
|2019||$0.35||N / A||$0.35|
|2020||$0.68||N / A||$0.68|
For 2022, Devon has already increased 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 US benchmark for oil – fails. is averaging $100 a barrel (it was around $120 on Friday).
Of course, Devon’s variable dividend will fall if oil prices fall. Still, the company has a strong balance sheet, favors dividends and also buys back shares. Reduce the number of shares outstanding is expected to increase its dividend per share even in a low oil price environment. In Friday’s action, the payout offers a high yield of 6.7%, and that could only go up if the stock price drops. With everything going on for Devon Energy, it’s clearly a dividend-paying stock you might want to buy at any dip.
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