Russia’s invasion of Ukraine has catapulted energy markets into an uncharted territory. The West is slapping unprecedented sanctions on the world’s second-largest oil producer—a move that can have long-lasting consequences for energy demand and supply.
According to Goldman Sachs, demand destruction is the only thing that can stop oil shooting higher after the US and European allies unleashed additional curbs on Russia following its invasion of Ukraine. The bank raised its one-month forecast for Brent crude to $115 a barrel, from $95, with significant upside risks on further escalation or longer disruption. In Asia on Monday morning, Brent was hovering around $130.
In this highly favorable pricing environment, the world’s largest oil companies—which only a year ago were considered endangered dinosaurs by some Wall Street analysts—are thriving, raking in their biggest profits in years.
One successful strategy to play this commodity boom is to buy the stocks of companies that pay higher dividends while maintaining spending discipline. Keeping this theme in mind, below we have short-listed two energy companies that fit the bill:
1. Devon Energy
Few oil producers still offer a respectable dividend yield and massive potential for growth. Oklahoma City-based Devon Energy (NYSE:DVN) is one of them. The shale producer, whose stock closed at $59.57 on Friday, has made it a policy to return extra cash to investors in the shape of dividends and buybacks.
Devon reported strong earnings for 2021 last month as its operating cash flow tripled in the year, and the company generated its highest-ever free cash flows, fueled by higher commodity prices. The company didn't just boost its dividend, it also increased its share-repurchase program.
The producer currently pays $1 a share quarterly dividend which translates into 6.7% annual yield. Devon pays a fixed as well as variable dividend under a new dividend policy it announced in 2021.
So far, every quarter, Devon paid a fixed dividend of $0.11 per share and a variable dividend equal to 50% of the extra cash flow it's left with after covering its capital expenditure and fixed dividend.
Given the current market situation, the company is well-positioned to generate massive cash flows, while keeping its sending in check. Devon Energy has also adopted a disciplined approach to drilling for oil, even as per-barrel prices have surged in recent months. The company has focused its efforts on expanding its free cash flow and returning more capital to shareholders.
Chief Executive Officer Rick Muncrief in an earnings statement last month said the producer will remain extremely disciplined by prioritizing value over the pursuit of volume.
2. Enbridge
Calgary, Canada-based Enbridge (NYSE:ENB) is another high-yielding stock to take advantage of the boom in energy markets. Enbridge is North America’s largest gas and oil pipeline operator, fulfilling consumers’ energy needs.
Enbridge moves nearly two-thirds of Canada’s crude oil exports to the US, and transports about 20% of natural gas consumed in the US. It also operates North America’s third-largest natural gas utility by consumer headcount.
Enbridge's cash flows are well diversified, generated across many businesses and geographies, helping the utility to weather the economic downturn better than other companies. While announcing 2021 financial results, its CEO Al Monaco said in a statement:
"Operationally, each of our businesses performed well, driven by a rebound in the global economy, customer demand, and the critical role our assets play in delivering essential energy supply. We placed $10 billion of growth capital into service, including the Line 3 Replacement Project, which will generate significant cash flow growth in 2022 and provide a foundation for future growth.”
ENB, whose shares closed at $44.75 on Friday, has a solid payout history. It has increased dividends at an annual rate of 10% in the last 26 years. Currently, the utility has an annual dividend yield of about 6%, which translates into a quarterly payout of $0.68.
The company forecasts it will increase distributable cash flows between 5% and 7% through 2023. It also expects to pay between 60% and 70% of its discounted cash flow (DCF) as dividends, making the payouts sustainable.