Energy stocks are among the stock market's best performers this year. Year to date, the Energy Select Sector SPDR ETF (XLE) is up 27% not including dividends, far outperforming the broader S&P 500 Index's 13% year-to-date decline.
For investors looking for individual stocks in the energy sector, we recommend sticking with quality businesses that have sustainable dividends along with long-term growth potential.
We believe Exxon Mobil (XOM) , Chevron Corp. (CVX) , and Devon Energy (DVN) are three of the top energy stocks for income investors (and we're hardly the only ones here at Real Money that like these names).
Exxon Mobil has a long and impressive history of growth. Its roots trace back to Standard Oil, the first oil company to dominate the industry. Interestingly, both of the current oil companies on the list of Dividend Aristocrats -- Exxon Mobil and Chevron -- are among the successor companies of Standard Oil.
Today, Exxon Mobil has a market capitalization of nearly $380 billion. It is a giant with a large upstream business engaged in discovery, exploration, and production of oil and gas. It also has a large downstream segment that includes refining, a midstream segment that includes oil and gas transportation, and a chemicals business.
In the 2022 second quarter, Exxon Mobil generated revenue of $115.7 billion, up 71% and ahead of analyst estimates by $4 billion. Adjusted earnings per share of $4.14 beat by $0.25 per share. The company generated cash flow from operating activities of $20 billion thanks to higher production, margin expansion, and effective cost controls.
Future growth is likely due to the company's strong assets. Exxon has about 10 billion barrels of oil equivalent in the Permian and expects to reach production of more than 1.0 million barrels per day in the area by 2025. Guyana, one of the most exciting growth projects in the energy sector, is the other major growth project of Exxon. Exxon has more than tripled its estimated reserves in the area, from 3.2 billion barrels in early 2018 to nearly 11.0 billion barrels now. Management has stated that 90% of new reserves have a production cost of $35 per barrel and thus it views the dividend as viable at Brent prices above $45.
Exxon Mobil has raised its dividend each year for over 40 years, even throughout various downturns. One reason is because of the company's immense financial scale, which provides flexibility to drastically cut costs to preserve profitability. This sets it apart from many smaller oil and gas producers that cannot stay profitable during industry downturns, and thus cannot maintain consistent dividend growth every year.
Exxon Mobil stock currently yields 3.9%.
Chevron is a global oil and gas supermajor. It is an integrated company, meaning it operates upstream exploration and production, midstream transportation and storage, and downstream refining of oil and gas.
In the 2022 second quarter, Chevron posted a double-beat. Quarterly revenue of $68.8 billion rose 83% year over year, and beat analyst expectations by over $11 billion. Adjusted EPS of $5.82 beat estimates by $0.79 per share. The company reported cash flow from operations of $13.8 billion along with free cash flow of $10.6 billion.
Along with high oil prices, new projects are a growth catalyst for Chevron. Chevron is now in the positive phase of its investing cycle. It expects to grow its output by 3%-4% per year until 2024. The pandemic derailed its growth trajectory for the past couple years, but the company has returned to growth mode thanks to its sustained growth in the Permian Basin and in Australia. Chevron has more than doubled the value of its assets in Permian in the past few years thanks to new discoveries and technological advances. Chevron's main competitive advantage is its size and industry position.
Chevron has a well-established track record of paying its dividend, even in recessions and downturns in the oil and gas industry. The company has increased its dividend for over 30 consecutive years, a period of time that encompassed multiple recessions. Therefore, there is at least a precedent of maintaining the dividend in turbulent times. The company qualifies as a Dividend Aristocrat.
As a commodity producer, Chevron is vulnerable to any downturn in the price of oil, particularly given that it is leveraged to the oil price. The payout ratio has become sustainable again as the company's financial results have improved.
The shares currently yield 3.6%.
Devon Energy is an independent energy company engaged primarily in the exploration, development and production of oil, natural gas and NGLs. On January 7, 2021, Devon and WPX Energy completed an all-stock merger of equals. The combined company benefits from enhanced scale, improved margins, higher free cash flow, and the financial strength to accelerate the return of cash to shareholders through a "fixed plus variable" dividend strategy.
The focus that the management team has in strengthening the balance sheet and returning capital to investors, rather than re-invest into the business at what is clearly the top of an oil cycle means that Devon Energy is well prepared for any downturn in the foreseeable future and will likely survive another oil price crash.
In the 2022 second quarter, the company reported revenue of $5.63 billion that rose 133% year over year, and beat estimates by $880 million. Adjusted EPS of $2.59 beat estimates by $0.22 per share. Devon raised its full-year production forecast by 3%, now expecting production of 600,000 to 610,000 barrels of oil equivalents per day.
Along with quarterly results, Devon announced a 22% increase to the quarterly fixed-plus-variable dividend. Going forward, the new annualized dividend rate of $6.20 per share represents a huge yield over 11%, of course investors should note the variable component of the dividend may not be as high if oil prices decline. Still, this represents a huge yield. And the company repurchased 23.9 million shares, or 4% of its outstanding shares, in the quarter for $1.2 billion.