Ever since the crude run-up to $120 a barrel back in June, shares of most of the top energy stocks in the sector have traded lower. That could be set to change soon. Top Wall Street strategists feel that demand for energy stocks could explode, especially the companies that have adopted the variable dividend strategy. While concerns over demand and worries over recession remain in place, it is important to remember that the Organization of the Petroleum Exporting Countries (OPEC) is in the process of cutting production by a massive 2 million barrels per day.

One big reason portfolio managers are seeking out the top large-cap exploration and production leaders is they offer outstanding free cash flow potential. Free cash flow is the cash a company generates after taking into consideration cash outflows that support corporate operations and maintain its capital assets. That is, free cash flow is the money that is left over after a company pays for its operating expenses and all capital expenditures.

Three of the top exploration and production leaders are using variable dividend plans, wherein the company installs a set regular dividend, one that will be paid if oil prices decline, and then increases payments to shareholders when oil prices are higher. Shares of all three of these top companies are rated Buy across Wall Street, but it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Devon Energy

This may be one of the best value propositions in the sector, and it was one of the first to utilize a variable dividend strategy. Devon Energy Corp. (NYSE: DVN) is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and natural gas liquids (NGLs) in the United States and Canada.

The company also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensate through its natural gas pipelines, plants and treatment facilities.

Production is weighted toward crude oil while growth opportunities are liquids focused, anchored by the Delaware Basin, SCOOP/STACK, Eagle Ford Shale, Canadian Oil Sands, and the Barnett. Devon also owns equity in the publicly traded midstream master limited partnership (MLP) EnLink.

Devon Energy merged with WPX in early 2021 in an all-stock merger of equals. The combined company operates more than 5,100 wells in Oklahoma’s Delaware Basis, Eagle Ford Group and the two locations in the Rocky Mountains. As of late 2022, the company laid claim to 1.625 million barrels of reserves, including 44% petroleum, 27% natural gas liquids (NGLs) and 29% natural gas. Daily production was running in the range of 300,000 barrels per day in petroleum liquids, 125,000 barrels per day in NGLs and 920 million cubic feet of natural gas.

Investors receive a 9.11% dividend. Devon Energy stock is another top pick at Truist Financial, and its $115 target price is also a Wall Street high. The consensus target is much lower at $79.89. The stock closed almost 3% higher on Monday at $69.80.

Diamondback Energy

This red-hot energy play has backed up nicely but looks poised to press higher again. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company focused on the acquisition, development, exploration and exploitation of unconventional and onshore oil and natural gas reserves in the Permian Basin in West Texas and New Mexico.
Diamondback Energy primarily focuses on the development of the Spraberry and Wolfcamp formations of the Midland basin, as well as the Wolfcamp and Bone Spring formations of the Delaware basin, which are part of the Permian Basin. As of December 31, 2021, the company’s total acreage position was approximately 524,700 gross acres in the Permian Basin, and estimated proved oil and natural gas reserves were 1,788,991 thousand barrels of crude oil equivalent.

The company also holds working interests in 5,289 gross producing wells, as well as royalty interests in 6,455 additional wells. In addition, the company owns mineral interests in approximately 930,871 gross acres and 27,027 net royalty acres in the Permian Basin and Eagle Ford Shale, and it owns, operates, develops and acquires midstream infrastructure assets, including 866 miles of crude oil gathering pipelines, natural gas gathering pipelines, and an integrated water system in the Midland and Delaware Basins of the Permian Basin.

Diamondback Energy stock investors receive an 8.40% dividend. Truist Financial says it is one of its top large-cap stock ideas, and its $203 target price is a Wall Street high. The consensus target is $173.59, and the final trade on Monday was for $139.46 a share.

Pioneer Natural Resources

Many Wall Street analysts love this stock as a pure crude oil play, and the company also employs a variable dividend strategy. Pioneer Natural Resources Co. (NYSE: PXD) operates as an independent oil and gas exploration and production company in the United States.

The company explores for, develops and produces oil, NGLs and natural gas. It has operations in the Midland Basin in West Texas. As of December 31, 2021, the company had proved undeveloped reserves and proved developed non-producing reserves of 130 million barrels of oil, 92 million barrels of NGLs and 462 billion cubic feet of gas, and it owned interests in 11 gas processing plants.

Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.

Pioneer is a huge player in the Permian basin and the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain a top player in the Permian, as it expects to deliver solid production growth going forward.

Investors receive an 8.48% dividend, which as with the other two companies may vary from quarter to quarter. Piper Sandler’s $339 target price is well above the $282.35 consensus target. Monday’s $244.05 close for Pioneer Natural Resources stock was up close to 2% for the day.

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It is very important to remember that variable dividend strategies can revert back to the lower payouts should the price of oil plummet. In 2020, at the height of the COVID-19 panic and lockdowns, oil crashed to below $20 a barrel level. While that kind of huge sell-off seems unlikely now, commodity prices have long been cyclical and prone to big moves.

With that caveat in place, these three exploration and production heavyweights all look poised for big total return potential in 2023. With benchmark pricing creeping higher, the big dividends look safe for now and the prices for all three have dropped dramatically since the summer.

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