In recent months, billionaire investors Warren Buffett and Carlos Slim have been making bold moves in the energy sector ($SREN), signaling a strong resurgence of interest. Legendary investor Warren Buffett's holding company Berkshire Hathaway (BRK.A) (BRK.B) poured another $434.8 million into Occidental Petroleum Corporation (OXY) through June 17, further solidifying its already huge position in the stock.
Similarly, Carlos Slim's investment company, Control Empresarial de Capitales, injected $75.5 million into PBF Energy Inc. (PBF) this month, marking a significant vote of confidence in the stock. But what could be the possible reason behind such bold investments? Energy Analyst Ben Cook at Hennessy attributes the current attractiveness of energy stocks to compelling valuation opportunities amidst recent market corrections.
Furthermore, with expectations of sustained oil price (CLQ24) support from OPEC, and continued strong demand for natural gas (NGQ24) amid the skyrocketing AI industry's electricity needs, energy companies are poised to benefit. Keeping all of these factors in mind, here’s a closer look at OXY and PBF.
Energy Dividend Stock #1: Occidental Petroleum
With a market cap of about $55.6 billion, Texas-based Occidental Petroleum Corporation (OXY) is a global energy company with significant assets in the United States, the Middle East, and North Africa. As one of the largest oil and gas producers in the U.S., the company has a strong presence in the Permian and DJ basins, as well as the offshore Gulf of Mexico.
Shares of Occidental have surged almost 10% over the past 52 weeks and 5.6% on a YTD basis.
On May 1, the company announced a quarterly dividend of $0.22 per share, set to be distributed to its shareholders on July 15. Its annualized dividend of $0.88 per share translates to a 1.4% dividend yield. With a conservative payout ratio of 17.78%, Occidental not only ensures its dividends are well-covered by earnings but also leaves ample room for future increases.
In terms of valuation, the stock trades at 16.26 times forward earnings, much lower than its own five-year average of 31.87x.
Occidental declared its Q1 earnings results on May 7, which blew past Wall Street’s predictions on the bottom line. Total revenue for the quarter stood at $6 billion, while its adjusted EPS of $0.63 topped estimates by a solid 11.1% margin. Strong operational performance generated $2 billion in operating cash flow, and $2.4 billion before working capital adjustments.
With $1.8 billion in capital spending and $57 million in contributions from noncontrolling interests, the company achieved $720 million in free cash flow before working capital. During the quarter, total production reached 1.17 million barrels of oil equivalent per day (Mboed), hitting the mid-point of guidance despite an extended third-party outage in the eastern Gulf of Mexico.
Reflecting on the Q1 performance, CEO Vicki Hollub said, “Operational excellence is fundamental to everything we do at Occidental, and our teams delivered at a high level across all segments during the first quarter of 2024, We are executing in all areas of our diversified portfolio and positioned for free cash flow growth."
At the end of last year, the company strategically enhanced its Midland Basin portfolio by acquiring CrownRock. Management expects this strategic move to bolster free cash flow, enhance portfolio quality, and potentially accelerate shareholder returns through increased equity appreciation. Furthermore, for Q2, management predicts total production to rise to a range of 1.23 million BOE per day to 1.27 million BOE per day, up from 1.17 million BOE per day recorded in Q1.
Analysts tracking Occidental expect the company’s profit to reach $3.88 per share in fiscal 2024, up 4.9% year over year, and rise another 27.6% to $4.95 per share in fiscal 2025.
Energy analyst Ben Cook attributed Berkshire Hathaway’s interest in Occidental shares to its prominence and liquidity, making the company an accessible way to invest in the U.S. oil market. According to Cook, there is also a deleveraging effect resulting from higher oil prices, which benefits equity holders. Large-cap energy companies are prioritizing capital allocation by reducing debt, buying back stock, and raising dividends.
OXY stock has a consensus “Moderate Buy” rating overall. Of the 21 analysts offering recommendations for the stock, six recommend a “Strong Buy,” 14 advise a “Hold,” and the remaining one gives a “Strong Sell” rating.
The average analyst price target of $72.05 indicates a potential upside of 14.3% from the current price levels. The Street-high price target of $90 suggests that the stock could rally as much as 42.8%.
Energy Dividend Stock #2: PBF Energy
Valued at $5.3 billion by market cap, New Jersey-based PBF Energy Inc. (PBF) is one of the largest independent petroleum refiners and suppliers in the United States. The company’s extensive distribution network spans the Northeast, Midwest, Gulf Coast, and West Coast of the U.S., as well as Canada, Mexico, and international destinations. With six domestic oil refineries and related assets, PBF Energy boasts a combined processing capacity of approximately 1 million barrels per day (bpd), ensuring a reliable supply to meet diverse market needs.
Shares of PBF Energy have climbed 10% over the past 52 weeks and 4.7% on a YTD basis.
The company remains committed to prioritizing capital allocation that maximizes long-term shareholder value. For Q1, PBF Energy paid its shareholders a quarterly dividend of $0.25 per share on May 30, and repurchased approximately $125 million of shares, highlighting its proactive approach to enhancing shareholder returns. Its annualized dividend of $1.00 per share translates to an attractive 2.11% dividend yield. Plus, the company’s low payout ratio of 8.98% leaves ample room for further dividend enhancements.
From a valuation perspective, priced at 7.35 times forward earnings and 0.14 times sales, the stock trades at a discount to its industry peers.
On May 2, the company announced its Q1 earnings results, which sailed past Wall Street’s forecasts on both the top and bottom lines. Its total revenue amounted to $8.7 billion, exceeding estimates by 3.8%. Also, its adjusted EPS of $0.85 topped projections by a notable 28.4% margin. At the end of the quarter, the company held approximately $1.4 billion in cash and carried approximately $1.2 billion in total debt.
Commenting on the Q1 performance, CEO Matt Lucey said, “Looking ahead, our balance sheet and the safe, reliable operations of all our assets remain our primary focus. We experienced somewhat normal seasonality in the product markets at the end of 2023 and through the early part of the first quarter. Industry maintenance and seasonal shifts in demand have improved market conditions as we approach the summer driving season.”
For Q2, management anticipates varied oil productions across its refinery regions, with total production within the range of 870,000 barrels per day and 930,000 barrels per day. Looking ahead to fiscal 2024, refining capital expenditures are projected to be between $800 million and $850 million.
Analysts tracking PBF Energy expect the company’s profit to come in at $5.67 per share in fiscal 2024.
Meanwhile, according to Cook, investors are highly attracted to the company’s commitment to return value to shareholders through share buybacks and dividends. PBF Energy spent 2023 improving its balance sheet by paying down debt and addressing environmental liabilities. Furthermore, geopolitical tensions abroad could serve as a significant catalyst. Any disruptions in refining operations or shipping could advantageously position PBF Energy and other U.S.-based refiners to benefit from increased demand.
PBF stock has a consensus “Moderate Buy” rating overall. Of the 12 analysts covering the stock, three recommend a “Strong Buy,” and the remaining nine give a “Hold” rating.
The average analyst price target of $55.20 indicates a potential upside of 20% from the current price levels. The Street-high price target of $69 suggests that the stock could rally as much as 50%.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
