Investors often use quarterly earnings results to decide whether to buy or sell individual stocks; however, investors who focus on past results will likely miss out on the blow-out positive quarters when looking at upstream energy producers.
Here’s what to look for instead, and what to look for…
Upstream energy companies are oil and gas producers. These companies drill wells to generate revenue from selling the oil and natural gas they produce. The variable nature of energy prices means that profits will swing up and down with changes in energy commodity prices.
The cost of producing a barrel of oil remains relatively steady. And natural gas, often an associated byproduct, provides extra revenue with little additional expense. The chart below shows the price of oil for the last year, which steadily declined from a year ago until the start of the 2023 third quarter. As a result, quarterly earnings in the upstream sector have also dropped.
Note that it was right at the end of the second quarter that oil bottomed in the $60s; it has since climbed into the low $80s. Upstream producers have been taking drill rigs out of service, leading to lowered production and likely continuing the price appreciation.
When the upstream energy companies report their third quarter in late October, I expect most will post positive earnings surprises. Several companies in this group pay variable dividends, and the higher profits will result in significant dividend boosts compared to the second quarter payouts.
Here is a list of the major U.S.-based upstream producers, market caps, second-quarter production levels, and dividend policies:
- EOG Resources, Inc. (EOG) has a market cap of $76 billion. Second-quarter production came in at 970,000 barrels of oil equivalent per day. EOG pays a stable dividend, which increases annually.
- Occidental Petroleum Corporation (OXY) has a market cap of $56 billion. Second-quarter production was 1.22 million BOE/D. OXY pays a stable dividend with a low current yield, which grows by more than 30% per year.
- Pioneer Natural Resources Company (PXD) has a $55 billion market cap. Second-quarter production of 711,000 BOE/D. PXD pays a variable dividend.
- Devon Energy Corporation (DVN) has a $32 billion market cap. For the second quarter, Devon produced 662,000 BOE/D. DVN pays a variable dividend.
- Diamondback Energy, Inc. (FANG) has a $32 billion market cap. In the second quarter, FANG produced 450,000 BOE/D. The company pays a growing regular dividend and occasional supplemental dividends.
- Marathon Oil Corporation (MRO) has a $16 billion market cap. For the second quarter, MRO produces 399,000 BOE/D. Marathon Oil pays a stable dividend, which has doubled over the last two years.
- APA Corporation (APA) has a market cap of 13.5 billion. For the second quarter, the company produced 325,000 BOE/D. APA slashed its dividend during the pandemic, but is now up to the pre-pandemic level.
In the current energy environment, these companies are committed to growing production using free cash flow, not debt. They are also committed to returning capital to shareholders through cash dividends and share buybacks.
It’s a good time to invest in these upstream energy stocks. It will be too late when they report third-quarter earnings.