Volatility is prevailing in the energy sector amid geopolitical risks, China-related growth worries and overall fear of recession as inflation remains elevated across the globe. Edward Jones in an industry report earlier this month said that it expects oil prices to stay higher than its expectations throughout 2024. Edward Jones said it is looking to own stocks in the integrated oil and storage & transportation subsectors. The firm said its focus is on companies with strong balance sheets that could weather the volatility in commodity prices and pay dividends.
A “Compelling Combination” of High Dividend Yields and Growth
The Missouri-based investment banking company said the average dividend yield of the energy sector is more than double the market yield, which makes integrate oil & gas and storage & transportation stocks with Buy ratings a “compelling combination” of high yields and dividend growth.
Edward Jones also believes energy companies are finally starting to practice some capital-spending discipline, after having “outspent” their cash flows for “years.” The firm, however, lamented over the energy sector’s lackluster performance track record, which it believes is the reason why investors are reluctant when it comes to investing in energy stocks. Edward Jones said the sector’s overall share of the S&P has fallen from over 14% in 2008 to approximately 3.9% as of May 15. However, the sector is showing signs of a rebound.
Investing in Energy Dividend Stocks Not Dependent On Near-Term Oil Prices
A Franklin Templeton report published earlier this month said that the energy sector has been the best performer within the MSCI All Country World Index, delivering around 10.3% of YTD total return. The report said the Templeton Global Equity Group is preferring to invest in energy stocks that are not dependent on near-term oil prices. Franklin Templeton also praised the sectors FCF generation, saying the free cash flow yield of the MSCI AC World Energy Index came in at 8.8%, compared to the 4% of the MSCI
“With ample cash flows, the energy sector has continued to reward shareholders with high dividends. The MSCI AC World Energy Index had a dividend yield of 4.4% as of year-end 2023, with market forecasts expecting the sector’s dividend yield to be sustained at 4.2% by the end of 2026. In contrast, the global benchmark yielded a dividend at around 2.1% as of year-end 2023, rising to a forecast 2.5% in 2026. More broadly, the current supply-side constraints relative to demand growth are positive for the sector’s outlook. While slowing, oil demand growth is still expected until at least 2030. However, based on TGEG research, the number of drilling projects has been declining steadily over the past decade, and existing oil fields are depleting at an annual rate of around 4%–5%. This disparity is likely to keep oil prices at or above marginal cost, which should help sustain cash flow generation in the energy sector.”
Photo by Zbynek Burival on Unsplash
Methodology
For this article we first scanned Insider Monkey’s proprietary database of 919 hedge funds and their holdings and picked listed down all energy stocks with over 2% dividend yield in which hedge funds had significant stakes in as of the end of the March quarter. From these stocks we chose 9 energy dividend stocks with the highest number of hedge fund investors.
9. Canadian Natural Resources Ltd (NYSE:CNQ)
Number of Hedge Fund Investors: 45
Insider Monkey recently processed latest 13F filings of over 900 elite hedge funds in the US. The results show that 45 hedge funds had stakes in Canadian Natural Resources Ltd (NYSE:CNQ) as of the end of the March quarter. The biggest stakeholder of Canadian Natural Resources Ltd (NYSE:CNQ) as of the end of Q1 was Donald Yacktman’s Yacktman Asset Management which had a $1.1 billion stake in Canadian Natural Resources Ltd (NYSE:CNQ).
Canadian Natural Resources Ltd (NYSE:CNQ) management talked about dividends and shareholder returns during Q1 earnings call:
“In the first quarter of 2024, we generated solid financial results with adjusted funds flow of $3.1 billion and adjusted net earnings from operations of $1.5 billion. This drove significant returns to shareholders in the quarter, totaling $1.7 billion, with $1.1 billion in dividends and $600 million in share buybacks through our NCIB program. As we reached net debt of $10 billion at the end of 2023, we are targeting 100% of free cash flow to shareholders in 2024, as per our free cash flow allocation policy, and we’ll continue to manage the allocation on a forward-looking annual basis. Our commitment to increasing shareholder returns is evident and are sustainable and growing quarterly dividends, which was previously increased to $1.5 per share from $1 per share in March 2024, marking 2024 as the 24th consecutive year of dividend increases.
Subsequent to quarter end, the board has declared a quarterly dividend of $1.5 per share payable on July 5th, 2024. Our financial position is very strong, with debt to EBITDA at 0.6 times at the end of Q1 24, and we continue to maintain strong liquidity, including revolving bank lines, cash, and short-term investments, liquidity at the end of the quarter was approximately $6.8 billion. As Scott has already laid out, when you combine our strategic plan in 2024, our continuous improvement initiatives and optimized production with strong commodity prices, specifically for WCS and high-value SEO, we are targeting significant free cash flow to the remainder of the year. This resulted in increasing shareholder returns through our 100% of free cash flow allocation policy.”
Read the full earnings call transcript here.
8. APA Corporation (NASDAQ:APA)
Number of Hedge Fund Investors: 45
Based in Texas, APA Corporation (NASDAQ:APA) is the holding company of Apache Corporation, an oil exploration company. Insider Monkey’s latest database of over 900 hedge funds updated for their Q1’2024 holdings shows that 45 hedge funds had stakes in APA Corporation (NASDAQ:APA). APA has a dividend yield of over 3.3% as of May 23.
Last month, Wells Fargo started covering the stock with an Overweight rating and a $55 price target, saying the stock is a “great way to get long duration oil exposure.”
Meridian Contrarian Fund stated the following regarding APA Corporation (NASDAQ:APA) in its fourth quarter 2023 investor letter:
“APA Corporation (NASDAQ:APA) is a global energy exploration and production company with operations in Egypt, the U.K., the North Sea, the U.S. Permian Basin, and Suriname, where it has made a significant oil discovery and sizeable additional discoveries are expected. We believe APA’s core global production profile is underappreciated and that the business is viewed as defensive, given its low cost to maintain and grow production. APA’s Suriname project, which is moving closer to development with partner TotalEnergies, is expected to provide differentiated low-cost production growth in two to three years as TotalEnergies is carrying the bulk of the development cost. This mix has allowed APA to otherwise aggressively allocate capital to pay down debt and increasingly focus on buying back stock as opposed to financing capital-intensive production growth. During the quarter, the stock declined as the mix of falling oil and gas prices and an announcement from TotalEnergies timed Suriname’s potential first production at the far end of estimates. We increased our holding in APA in the fourth quarter since the timing delay would not change the value we ascribe to the Suriname production. Adding to our confidence was news of the potentially increased size and amount of the first production from that region which, in our view, would more than offset the negative effect of the delay.”
7. Chord Energy Corp (NASDAQ:CHRD)
Number of Hedge Fund Investors: 46
With a divided yield of over 5% and a PE ratio of 8.26, Texas-based energy company Chord Energy Corp (NASDAQ:CHRD) is one of the most popular divided stocks to buy based on hedge fund sentiment. As of the end of the first quarter of 2024, 46 hedge funds out of the 919 funds tracked by Insider Monkey had stakes in Chord Energy Corp (NASDAQ:CHRD). The most significant stake in Chord Energy Corp (NASDAQ:CHRD) is owned by Ken Griffin’s Citadel Investment Group which had a $131 million stake in Chord Energy Corp (NASDAQ:CHRD).
Earlier this month, Chord Energy Corp (NASDAQ:CHRD) posted Q1 results. GAAP EPS in the period came in at $4.65, meeting estimates. Revenue jumped 21.6% year over year to $1.09 billion, surpassing estimates by $323.74 million.
Madison Small Cap Fund stated the following regarding Chord Energy Corporation (NASDAQ:CHRD) in its first quarter 2024 investor letter:
“Our Energy underweight was also a slight drag, although we are optimistic about our singular investment in this sector with Chord Energy Corporation (NASDAQ:CHRD). During Q1 the company announced a strategic combination with Canadian-based Enerplus Corporation (TSX: ERF). Enerplus is one of, if not the best remaining assets in the Bakken and we are very constructive on the financial and strategic merits of this transformational deal. CHRD will become the largest operator in the Bakken, representing about 12% of the basin’s production. With a solid balance sheet post deal, CHRD will now be in the enviable position of either the basin’s main consolidator or most strategic asset as a target for larger E&P companies.”
6. Shell Plc (NYSE:SHEL)
Number of Hedge Fund Investors: 50
With over 3.5% dividend yield and strong cash flow position, Shell Plc (NYSE:SHEL) is one of the best energy dividend stocks to buy according to hedge funds. Shell Plc (NYSE:SHEL) recently posted strong Q1 results, and announced that it will buy back $3.5 billion of its shares over the next three months.
Of the 919 hedge funds tracked by Insider Monkey, 50 hedge funds reported owning stakes in Shell Plc (NYSE:SHEL). The most notable stake in Shell Plc (NYSE:SHEL) is owned by Fisher Asset Management, worth over $1.6 billion.
5. Chesapeake Energy Corp. (NASDAQ:CHK)
Number of Hedge Fund Investors: 52
Chesapeake Energy Corp. (NASDAQ:CHK) is facing headwinds amid declining natural gas prices. Last month Chesapeake Energy Corp. (NASDAQ:CHK) posted Q1 results, according to which adjusted EPS in the period came in at $0.56, missing estimates by $0.07. Chesapeake Energy Corp. (NASDAQ:CHK) delivered $112 million in adjusted free cash flow yielding a combined quarterly base and variable dividend of $0.715 per common share to be paid in June 2024. Chesapeake Energy Corp. (NASDAQ:CHK) talked about its dividends in Q1 earnings call
Reports suggest that to offset the effects of declining natural gas prices, Chesapeake Energy Corp. (NASDAQ:CHK) has started laying off employees following the divestiture of Eagle Ford assets last year.
4. Chevron Corp. (NYSE:CVX)
Number of Hedge Fund Investors: 62
With 37 years of consistent dividend increases, oil giant Chevron Corporation (NYSE:CVX) is one of the best dividend growth stocks to buy according to hedge funds. Chevron Corporation (NYSE:CVX) has been paying dividends without a break since 1984. Its annual dividend growth rate over the past three years is 5.40%. Chevron Corporation (NYSE:CVX)’s payout ratio is about 56%, which is higher than the industry mean of 45%, but given the company’s huge cash flows and strong fundamentals, dividend safety isn’t a major concern for Chevron Corporation (NYSE:CVX) investors
On April 26, the company declared a quarterly dividend of $1.63 per share, which fell in line with its previous dividend. This year, the company achieved its 37th consecutive annual dividend hike. As of May 11, the stock has a dividend yield of 3.93%.
In the first quarter of 2024, Chevron Corporation (NYSE:CVX) reported an operating cash flow of $6.8 billion and its free cash flow amounted to $2.7 billion. During the quarter, the company returned $3 billion to shareholders through dividends.
Carillon Eagle Growth & Income Fund stated the following regarding Chevron Corporation (NYSE:CVX) in its fourth quarter 2023 investor letter:
“Chevron Corporation (NYSE:CVX) traded lower, along with oil prices, and issued a disappointing earnings announcement due to overseas refining losses. Separately, the company announced an agreement to buy another energy company with operations offshore of Guyana, as well as in North Dakota, the Gulf of Mexico, and the Gulf of Thailand. This is a strategic acquisition for very little takeout premium.”
3. Conoco Phillips (NYSE:COP)
Number of Hedge Fund Investors: 62
Of the 919 hedge funds in Insider Monkey’s database as of the end of the first quarter, 62 funds had stakes in Conoco Phillips (NYSE:COP). The biggest stakeholder of Conoco Phillips (NYSE:COP) during this period was Boykin Curry’s Eagle Capital Management which owns a $1.8 billion stake in Conoco Phillips (NYSE:COP). Like other energy companies Conoco Phillips (NYSE:COP) is also facing headwinds amid volatile energy prices. However, during Conoco Phillips’ (NYSE:COP) latest earnings call, this volatility won’t affect shareholder returns.
“Moving to cash flows. First quarter CFO was $5.1 billion, which included APLNG distributions of $521 million. Capital expenditures were $2.9 billion. Debt retirement payments were $500 million and this was partially offset by proceeds of $200 million from disposition of non-core assets. And we returned $2.2 billion to shareholders in the quarter, including $1.3 billion in buybacks and $900 million in ordinary dividends and VROC payments. We ended the quarter with cash and short-term investments of $6.3 billion and $1.1 billion in longer-term liquid investments. Turning to guidance. We’ve maintained our full year production outlook of 1.91 million to 1.95 million barrels of oil equivalent per day, which translates to 2% to 4% underlying growth.
And for the second quarter, we expect production to be in the range of 1.91 million to 1.95 million barrels a day equivalent also which represents a similar 2% to 4% year-over-year underlying growth. Our full year turnaround forecast is 30,000 barrels per day. This includes 25,000 barrels per day of turnarounds in the second quarter primarily in Alaska, Norway and Qatar and 90,000 barrels per day for the third quarter. And as we mentioned on the last earnings call, the heavy third quarter maintenance was driven by our once every five-year turnaround at Surmont. For CapEx our full year guidance remains $11 billion to $11.5 billion with a greater weight to the first half of the year.”
Read the full earnings call transcript here.
2. Schlumberger Ltd. (NYSE:SLB)
Number of Hedge Fund Investors: 66
Oil services company Schlumberger Limited (NYSE:SLB) is one of the best energy dividend stocks according to hedge funds. A total of 66 hedge funds reported owning stakes in the company as of the end of the March quarter. Schlumberger has been paying dividends consistently since 1985. In January this year, the company increased its quarterly dividend by 10%.
Artisan Value Fund stated the following regarding Schlumberger Limited (NYSE:SLB) in its fourth quarter 2023 investor letter:
“On the downside in Q4, our two energy holdings, Schlumberger Limited (NYSE:SLB), the world’s largest oil services company, and EOG Resources, a US shale-focused E&P company, were weak along with the broader sector. We have stringent criteria for business quality, which is particularly important in commodities sectors as these businesses do not control the underlying commodity prices, which can be volatile. We expect Schlumberger to continue to successfully navigate market volatility and deliver on its free cash flow and profit margin growth objectives from combination of activity growth and pricing gains. The stock has been among our top contributors since we initiated our position in December 2020.”
1. Exxon Mobil Corp. (NYSE:XOM)
Number of Hedge Fund Investors: 81
With over four decades of consistent dividend increases, oil giant Exxon Mobil Corp. (NYSE:XOM) is the best dividend to buy in the energy sector according to hedge fund investors. As of the end of the first quarter of 2024, 81 funds reported having stakes in Exxon Mobil Corp. (NYSE:XOM). The most notable stake in Exxon Mobil Corp. (NYSE:XOM) is owned by Ken Fisher, valued at over $3 billion.
In April, Exxon Mobil Corp. (NYSE:XOM) posted Q1 results. Adjusted EPS in the period came in at $2.06, missing estimates by $0.12. Revenue fell 4% year over year to $83.08 billion, beating estimates by $1.57 billion.
Madison Dividend Income Fund stated the following regarding Exxon Mobil Corporation (NYSE:XOM) in its first quarter 2024 investor letter:
“This quarter we are highlighting Exxon Mobil Corporation (NYSE:XOM) as a relative yield example in the Energy sector. XOM is a leading integrated oil and natural gas company. It has upstream assets that develop and produce oil and natural gas, along with downstream refining and chemical manufacturing assets. We believe it has attractive low-cost acreage in the Permian basin and has a sizeable growth opportunity in Guyana. Further, we think XOM has a sustainable competitive advantage due to size and scale, and its ability to integrate refining and chemical assets provides a low-cost advantage versus competitors.
Our thesis on XOM is that it will grow production volumes of oil and gas moderately over the next few years, while limiting excessive capital investment that plagued the industry from 2014-2020. Production growth will come from its 2023 acquisition of Pioneer Natural Resources, which is the largest producer in the Permian basin. XOM plans to double its Permian output by 2027, to 2 million barrels per day. Capital spending will be limited to $20-25 billion per year through 2027, which should allow for significant amounts of cash to be returned to shareholders including a $35 billion share repurchase program and continued dividend increases. Higher oil prices would provide a tailwind to our thesis but are not necessary. We think XOM can grow earnings and cash flow if oil prices remain above $60 per barrel…” (Click here to read the full text)
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