Crude oil prices and the share prices of upstream energy stocks have been on a wild ride. Recently, WTI crude has dropped from $105 to about $90 per barrel.
Upstream energy stocks have also fallen sharply. Here are the year-to-date stock charts with normalized returns for a couple of my favorite upstream stocks: Diamondback Energy (FANG) and Devon Energy (DVN).
These returns are attractive, except that WTI crude oil is up 58%.
While traders worry about and move the stock prices based on short-term moves in oil, I am looking for a very profitable third-quarter earnings season from energy stocks. For the third quarter, WTI traded between $90 and $107 per barrel. For the second quarter, the range was $69 to $114 per barrel.
I have highlighted Diamondback and Devon for two reasons. From the crude oil price numbers above, I expect third-quarter profits to match or exceed their second-quarter results. But Wall Street sees it differently.
For the second quarter, Diamondback earned $6.48 per share. The consensus for the third quarter is $4.88. For Devon, the numbers are $1.57 and $1.20 per share, respectively. I expect very positive earnings surprises from these two companies.
Diamondback and Devon have similar dividend policies. They pay fixed quarterly dividends with solid annual increases. The companies also commit to returning 50% of their free cash flow to shareholders. They are flexible on how they can pay out the extra cash flow, such as special dividends, buy back shares, or pay down debt.
Over the last few years, the companies have focused on share buybacks. Devon last paid a supplemental dividend for the 2024 third quarter. Diamondback also last paid an extra dividend for the same quarter.
With crude prices high for the last six months and stock prices
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