Oil Dividends Are Roaring Back as Industry's Recovery Accelerates - Barron's

An out-of-use oil pump jack in Texas. The pandemic hammered demand for oil.

Francois Picard/AFP via Getty Images

The crisis that hit oil stocks a year ago is over. Not only are companies that cut their dividends under duress restoring or increasing them, some analysts are predicting a resurgence in payouts that could last for years.

At the height of the pandemic, demand for oil shriveled and prices briefly went negative. The industry’s rebound was expected to take a while, perhaps until economies fully normalized after the pandemic, but progress has been faster than anticipated.

Chesapeake Energy (ticker: CHK) is an example of the shift. Its heavy debt load caught up with it as the pandemic caused demand and prices to plummet. Now, it is a much smaller company than in its heyday, operating seven drilling rigs around the country, half the number it ran a year ago. It recently terminated a naming-rights agreement with the Oklahoma City Thunder basketball team, another sign of diminished stature.

The company emerged from bankruptcy in February and declared an annual dividend of $1.375 per share on Tuesday, giving it a dividend yield of 2.7%. Investors appear to be gaining faith: The stock was up 1.7% around noon on Wednesday, after rising as much as 7% earlier.

After the restructuring, Chesapeake now has $1.3 billion in long-term debt, down from $9.2 billion in the first quarter last year. Chesapeake generated $409 million in operating cash flow in the quarter, leaving it with ample room to return some to shareholders. And the company says it will likely hand back more in the not-too-distant future.

“Now we expect that yield to grow,” said CFO Domenic Dell’Osso on the company’s earnings call on Wednesday. “We expect to have significant cash flow, free cash flow beyond what we’re paying out in dividends.”

Investors in another energy company also got a nice surprise dividend this week. CVR Energy (CVI), a Texas refiner, said late on Tuesday that it would pay out $492 million in special dividends. That equates to a “whopping” 23% dividend yield, noted analysts at Tudor, Pickering, Holt & Co.

CVR’s decision was actually not motivated by higher oil prices. In fact, it was kind of the opposite. The company has decided not to expand its traditional refining operations, and now is flush with cash. Instead, CVR says it will focus on renewable diesel.

“As a result of the Board’s determination to cease efforts to acquire another refinery, we have excess cash on our balance sheet,” said CEO Dave Lamp in a statement. “We are earning very little on this cash and, when we issued our bonds, we bargained for covenant capacity, which will be expiring shortly, to make a distribution of up to $492 million to our stockholders.”

Another oil company that is paying a special dividend is producer EOG (EOG). The company, which already had a 2% dividend yield after raising its regular payout early in the year, announced an additional payment of $1 a share on Friday. On its own, that represents a yield of about 1.2% based on current prices.

The stock rose more than 8% after the announcement.

Tudor, Pickering, Holt analysts expect this trend to continue and possibly make the industry more attractive to investors.

“In our view, this shift could start to attract more yield investors to the space as common + variable dividends at strip next year could approach high single digit or low double digit levels, married with pristine balance sheets and a sector for the most part that is committed to capping growth,” they wrote. “All in, this earnings season set the stage for what’s to come and we suspect that as more companies join the fold, tangibly paying out solid dividends, the sector could continue to rerate while making the cost of carry for shorts more expensive.”

Write to editors@barrons.com

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