4 U.S. Energy Stocks With Fast-Growing Dividends

A record year of profits means U.S. energy companies are paying buckets of cash to investors.

Lauren Solberg 13 April, 2023 | 4:16AM
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Oil rig

The gusher of profits that energy companies enjoyed from surging oil and gas prices turned into a bonanza for dividend investors in 2022.

While 2023 isn’t likely to repeat that windfall for investors, dividend growth among U.S.  energy stocks is still on an upward trend.

For energy stocks that pay dividends, the average dollar amount paid to investors grew by 390% in 2022, led by oil and gas exploration and production companies such as Diamondback Energy FANG and Pioneer Natural Resources PXD. For the rest of the U.S. market, dividend amounts increased by just 29% on average in 2022.

Commodity prices were the key driver of the surge in energy stock dividends: Oil and natural gas price levels both hit multiyear highs in 2022.

In addition, there’s been a longer-standing trend among energy companies—mainly the oil and gas E&P industry—of slowing down their investments into production growth in favor of returning cash to shareholders.

“Energy companies were flush with cash,” says David Meats, director of equity research for energy and utilities at Morningstar. “That gave them the ability to use that cash in several shareholder-friendly initiatives.”

For many energy stocks that pay dividends, this profit boom has translated into a big increase in traditional dividends. There’s also been wider adoption of what are known as variable dividends, a strategy that Morningstar analysts see as often the most attractive option for investors.

4 Energy Stocks With Fast-Growing Dividends

Below are four U.S.-based oil and gas companies within the E&P industry that have been growing their dividends. All four offer one of the variable-dividend strategies that Meats and his team look for. These energy companies have also earned Morningstar Economic Moat Ratings of narrow, meaning they have competitive advantages strong enough to fend off competition and earn strong returns on capital for up to 10 years into the future:

  • Diamondback Energy
  • Pioneer Natural Resources
  • Devon Energy
  • EOG Resources

For now, Meats notes, Morningstar equity analysts see these stocks as roughly in line with their fair value estimates—all of them carry a Morningstar rating of 3 stars. But from a dividend standpoint, they’ve got strong practices with variable dividends that they can sustain through all the ups and downs of the market.

Diamondback Energy

  • Industry: Oil and Gas Exploration and Production
  • Economic Moat: Narrow

“Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most recently Firebird Energy and Lario Permian in 2022. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.”

“Because of its enviable Permian Basin acreage, Diamondback Energy is the lowest-cost producer in the upstream oil and gas segment. As such, the company is better positioned to cope with weak oil prices than most peers, and at our midcycle forecast—currently $55/barrel (West Texas Intermediate)—it can really thrive. Accordingly, we award a narrow moat rating.”— David Meats

Pioneer Natural Resources

  • Industry: Oil and Gas Exploration and Production
  • Economic Moat: Narrow

“Pioneer Natural Resources is one of the largest Permian Basin oil and gas producers overall, and is the largest pure play. It has about 800,000 net acres in the play, all of which is located on the Midland Basin side where it believes it can get the best returns. The firm acquired the bulk of its acreage well before the shale revolution began, with an average acquisition cost of around $500 per acre. That’s a fraction of what most of its peers shelled out during the land grab at the beginning of the Permian boom, giving the firm a unique advantage. And the vast majority of this acreage is located in the core of the play, where well performance is typically strongest. That gives Pioneer an extensive runway of low-cost drilling opportunities.”

“We believe Pioneer has the ability to earn maintainable excess returns on invested capital, justifying a narrow moat rating. The company operates exclusively in the Permian Basin, which is the cheapest source of crude oil in the U.S.—sitting below other shale plays, deep-water projects, and all other unconventional sources on the global cost curve. Pioneer is ideally located within the play as well. That’s important because the precise surface location of a horizontal shale well plays a huge part in determining its eventual productivity and also influences the oil content of its production stream. By focusing on areas that typically yield very impressive initial flow rates, Pioneer’s fixed costs, such as drilling and completions, are spread more thinly, delivering more bang for the buck. The firm’s ideally located acreage also supports above-average unit revenue, as oil cuts are generally strong.”— D.M.

Devon Energy

  • Industry: Oil and Gas Exploration and Production
  • Economic Moat: Narrow

“Devon Energy (DVN) is an oil and gas producer based in Oklahoma. It has assets in several shale basins across the United States, including the Delaware Basin, Eagle Ford Shale, STACK, and Powder River Basin. Management has reshuffled the portfolio in the last few years, divesting its Canadian oil sands business and exiting the Barnett Shale natural gas play. In January 2021, it combined with another Oklahoma-based shale firm, WPX Energy, in a ‘merger of equals’ that significantly expanded Devon’s Delaware Basin exposure and added a small position in the core of the Bakken Shale fairway in North Dakota. The merger brought economies of scale and more efficient field operations, and enhanced the competitiveness of the combined firm.”

“Devon has an inherent cost advantage baked into its asset portfolio (Rystad Energy ranks Devon first among U.S. E&Ps on breakeven costs associated with undeveloped reserves, ahead of several narrow-moat firms such as Diamondback Energy and EOG Resources). This enables the company to reliably deliver excess returns on invested capital, which are a hallmark of moaty companies in our framework. We therefore assign a narrow moat rating.”— D.M.

EOG Resources

  • Industry: Oil and Gas Exploration and Production
  • Economic Moat: Narrow

“EOG Resources (EOG) is one of the largest independent oil producers. Most of its production comes from shale fields in the U.S., with a small contribution from Trinidad. The firm differentiates itself by looking for prospective areas before most peers catch on, enabling it to secure leasehold at attractive rates (rather than overpaying for land after the market overheats). It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin (Wyoming) and a new natural gas play in southern Texas that the firm has christened ‘Dorado.’”

“Until recently, very few shale producers were paying attention to shareholder returns, but EOG was one of them. The firm actually delivered excess returns on invested capital for five of the six years of 2009-14, before the downturn in global crude prices began. That pushed returns back in negative territory for several years. But a relentless focus on cost-cutting, productivity, and efficiency eventually paid off, enabling EOG to start earning its cost of capital again and qualifying the firm for a narrow moat rating.”— D.M.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Devon Energy Corp48.15 USD-0.17Rating
Diamondback Energy Inc193.46 USD0.78Rating
EOG Resources Inc123.27 USD-0.61Rating
Pioneer Natural Resources Co233.96 USD0.00Rating

About Author

Lauren Solberg  Data journalist for Morningstar.

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