The energy sector ($SREN) is blazing a trail higher, up 9% on a YTD basis. This surge is powered by OPEC+ production cuts, rising oil prices, and optimistic demand forecasts, highlighted by the Energy Information Administration’s (EIA) upbeat revision to oil price forecasts for 2024.
Earlier this month, oil prices (CLQ24) dipped due to OPEC’s production restoration plan, but quickly rebounded. Optimism around anticipated interest rate cuts, ongoing tensions between Hamas and Israel, and drone attacks on Russian refineries bolstered crude prices. An easing U.S. dollar further strengthened the market.
Longer term, the EIA forecasts Brent crude oil to average $89 per barrel in 2024, while the World Bank and Fitch Ratings caution that supply restrictions and regional conflicts could drive prices to $120/bbl.
Against this backdrop, three dividend-paying energy stocks – Patterson-UTI Energy, Inc. (PTEN), Valero Energy Corporation (VLO), and Chesapeake Energy Corporation (CHK) - have pulled back, but are rated "Buy" or higher, making them potential buy-the-dip opportunities.
Let’s take a closer look.
Energy Dividend Stock #1: Patterson-UTI Energy
Patterson-UTI Energy, Inc. (PTEN), a Houston-based energy powerhouse since 1978, is a leader in contract drilling services for oil and natural gas (NGQ24) operators in the U.S. and globally, with a $4.2 billion market cap. With three dynamic segments – Drilling Services, Completion Services, and Drilling Products – Patterson-UTI is at the forefront of the energy services industry.
Its Contract Drilling Services excel in onshore drilling, while Completion Services master hydraulic fracturing and more. Patterson-UTI’s drilling products segment crafts top-notch drill bits and cutting-edge software like MWD Survey FDIR. The company's expertise and forward-thinking technology make it a key player in the energy industry. For May 2024, the company had an average of 114 drilling rigs operating in the U.S.
The stock has pulled back 36% from the 52-week high of $16.18, achieved on Sept. 14, and recently hit a fresh low of $9.68 on June 17. Shares of PTEN are down 10% over the past 52 weeks and 4.9% YTD.
Patterson-UTI Energy has been rewarding its shareholders with dividends for nearly two decades. On June 17, the company paid a $0.08 per share quarterly dividend. It currently offers an annual dividend of $0.32 per share, translating to a solid 3.20% yield. With a payout ratio of 40.2%, PTEN balances maintaining this steady dividend and fueling its growth.
The company's commitment to returning capital to shareholders is evident, with $130 million already distributed in Q1 of 2024, and plans to return a minimum of $400 million this year. Specifically, PTEN repurchased 9 million shares worth $98 million in the first quarter and paid out $32.5 million in dividends, underscoring its financial strength and investor-friendly approach amid recent strategic acquisitions.
In terms of valuation, the stock trades at 0.98 times sales, which is lower than its industry peer Transocean Ltd. (RIG) and its own five-year average of 1.09x.
The onshore contract drilling service provider unveiled its Q1 earnings results on May 1. Its revenue of $1.5 billion matched Wall Street’s forecasts, while adjusted EPS of $0.15 topped projections by 15.4%.
Patterson-UTI generated $366 million in cash from operations and $139 million in free cash flow, while its adjusted EBITDA stood at $375 million. Since the start of 2022, it has returned over 80% of its free cash flow to shareholders, while at the same time improving its free cash flow conversion. The company expects to convert at least 40% of its adjusted EBITDA to free cash flow in 2024.
Management anticipates a bright future in the U.S. shale industry, with stable drilling and completion activity in oil basins. Despite a brief slowdown in natural gas operations, PTEN forecasts an average of 114 U.S. rigs in operation, with ongoing enhancements in their electric fleet aiming for significant horsepower by mid-2024. Drilling Products and Completion Services are set for consistent performance, driven by strategic expansions and operational efficiencies.
Analysts tracking PTEN project the company’s profit to reach $0.55 per share in fiscal 2024 and grow 54.6% to $0.85 per share in fiscal 2025.
PTEN stock has a consensus “Moderate Buy” rating overall. Out of the 15 analysts covering the stock, nine suggest a “Strong Buy,” one advises a “Moderate Buy,” and the remaining five analysts are playing it safe with a “Hold” rating.
The average analyst price target of $15.87 indicates a potential upside of 54.5% from the current price levels. But the real excitement comes from the Street-high target of $22, hinting at a rally of up to 114%.
Energy Dividend Stock #2: Valero Energy
San Antonio-based Valero Energy Corporation (VLO), founded in 1980, is a powerhouse in producing and distributing transportation fuels and petrochemicals. With a reach extending across the U.S., UK, Ireland, and Canada, Valero turns crude oil into high-quality gasoline, diesel, jet fuel, and asphalt.
But it’s not just about traditional fuels – Valero’s leap into renewable energy, with a thriving ethanol (FLQ24) and renewable diesel business, showcases its innovative edge. Valero’s market cap currently stands at $49.3 billion, underscoring its significant impact on the energy sector.
VLO stock is trading 17.4% below its 52-week high of $184.79, set in early April, and has dipped 6% over the past month. However, the stock is up 37.2% over the past 52 weeks, including a solid 17.4% YTD rally.
When it comes to rewarding shareholders, Valero does not miss a beat. With an impressive 26-year streak of paying dividends, it is the definition of reliable.
On May 15, Valero announced a quarterly dividend of $1.07 per share, payable to its shareholders on June 28. Offering an annualized dividend of $4.28 per share and a yield of 2.84%, Valero stands out with a payout ratio of just 19.9%, leaving plenty of room for future growth. For income-focused investors, Valero's consistency makes it a compelling choice.
Priced at a modest 8.80x forward earnings and 0.34x sales, VLO stock trades lower than its industry peers, and its own five-year averages. This might make VLO stock an undervalued gem to snag.
On April 25, Valero Energy reported its Q1 earnings results, which sailed past Wall Street projections on the bottom line. With the company’s revenue hitting $31.8 billion, its adjusted EPS of $3.82 exceeded forecasts by 20.1%. Its adjusted net cash provided by operating activities reached $1.9 billion.
During the quarter, Valero demonstrated its commitment to shareholders by returning $1.4 billion, including $356 million in dividends and $1 billion through share buybacks. This payout amounted to 74% of adjusted net cash provided by operations, highlighting Valero's robust financial health and strategic capital allocation.
Analysts tracking Valero Energy expect the company’s profit to reach $17.32 per share in fiscal 2024.
Wall Street is feeling upbeat, giving Valero Energy a "Moderate Buy" consensus rating. Out of 16 analysts in coverage, 12 recommend a "Strong Buy," three suggest a “Hold,” and one advises a “Strong Sell."
The average analyst price target of $178 indicates a potential upside of 16.3% from the current price levels. The Street-high price target of $200 suggests that the stock could rally as much as 30.6%.
Energy Dividend Stock #3: Chesapeake Energy
Founded in 1989 and headquartered in Oklahoma City, Chesapeake Energy Corporation (CHK) is a trailblazer in the independent exploration and production sector across the U.S. Specializing in the acquisition, exploration, and development of properties, Chesapeake focuses on extracting oil, natural gas, and natural gas liquids from underground reservoirs.
The company boasts substantial interests in prime natural gas resource plays, including the Marcellus Shale in Pennsylvania and the Haynesville/Bossier Shales in Louisiana. With a commitment to innovation and sustainable energy solutions, Chesapeake Energy continues to shape the future of America's energy landscape. Its market cap currently stands at $11.1 billion.
The stock has slipped 10.8% from its 52-week high of $93.58, achieved on April 30, and dipped 6.9% over the past month. More broadly, shares of Chesapeake Energy have gained 8.5% on a YTD basis and 3.6% over the past 52 weeks.
On June 5, Chesapeake Energy paid its shareholders a quarterly dividend of $0.575 per share and a special dividend of $0.14 per share. Its annualized dividend of $2.30 per share translates to a 2.71% dividend yield. Also, the company maintains a healthy dividend payout ratio of 75%, reflecting its commitment to sustainable dividend distributions while supporting future growth initiatives.
In terms of valuation, the stock is trading at 1.24 times sales, slightly lower than its peer, APA Corporation (APA).
On April 30, the company reported its Q1 earnings results. Revenue amounted to $589 million, while the company posted an adjusted EPS of $0.56. Plus, Chesapeake generated $552 million of operating cash flow and $112 million of adjusted free cash flow.
In Q1, Chesapeake Energy achieved net production of about 3.20 bcfe per day (100% natural gas), employing nine rigs to drill 28 wells and bring 29 wells online. The company also expanded its inventory with 24 drilled but uncompleted (DUC) wells and 22 deferred turn-in lines (TILs). Currently operating eight rigs and two completion crews, Chesapeake plans to drop one Marcellus rig by mid-year. With 50 DUCs and 22 deferred TILs by Q1-end, Chesapeake targets drilling 95 to 115 wells and bringing 30 to 40 wells into production for the full year.
Analysts tracking the natural gas company expect its profit to reach $0.98 per share in fiscal 2024 and jump 435.7% to $5.25 per share in fiscal 2025.
Chesapeake stock has a consensus “Moderate Buy” rating overall. Out of the 17 analysts covering the stock, seven suggest a “Strong Buy,” two recommend a “Moderate Buy,” and the remaining eight advise a “Hold.”
The average analyst price target of $101.53 indicates a potential upside of 21.7% from the current price levels. The Street-high price target of $117 suggests that the stock could rally as much as 40.3%.
On the date of publication, Sristi Suman Jayaswal 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.
