Energy was the best performing sector in the S&P 500 last year. And that momentum carried over to 2022.
Year-to-date, the Energy Select Sector SPDR Fund (XLE) is up 44%, in stark contrast to the S&P 500’s double-digit decline.
One investment legend has benefited greatly from the energy boom: Warren Buffett.
Buffett’s Berkshire Hathaway backed oil and gas giant Occidental Petroleum’s (OXY) truck after the company’s earnings call held in late February. Buffett read the transcript and liked what he saw.
“We started shopping on Monday and bought everything we could,” he told CNBC.
Later, Buffett bought more – much more.
According to the latest SEC filing, Berkshire now owns 188.4 million shares of OXY, worth $14 billion. This makes OXY Buffett’s sixth largest holding.
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A bet since 2019
In 2019, Berkshire spent $10 billion in Occidental preferred stock to help the company buy its Houston-based energy producer Anadarko Petroleum.
Occidental pays an 8% annual dividend on these preferred shares, providing Berkshire with $200 million each quarter in dividend income.
The agreement also gives Berkshire guarantees to buy 83.9 million shares of Occidental common stock at an exercise price of $59.62.
“It’s also a gamble on the fact that the Permian Basin is what it appears to be,” Buffett told CNBC in 2019, adding that “if [oil] goes up, you make a lot of money.”
Here are two more Permian Basin energy plays to think about – they also pay big dividends.
Plains All American Pipeline (PAA)
With strong oil and gas prices, producers are making a lot of money. But when it comes to returning money to investors, midstream operators are also worth a look.
Check out Plains All American Pipeline, a limited master partnership with an extensive pipeline collection network and transportation systems. The partnership says its objective is to “increase its distribution to Unitholders over time through a combination of organic and acquisition-oriented growth”.
PAA assets are strategically located, with critical infrastructure for collecting and withdrawing crude oil from the Permian Basin. In the second quarter, the partnership completed a $42 million acquisition of the Permian Basin of the remaining 50% of the Advantage JV pipeline.
Earlier this year, management raised the quarterly PAA distribution by 21% to $0.2175 per unit. At the current unit price, the stock is yielding a generous 7.1%.
While the broad market is in the red so far, the PAA is up 25% in 2022.
Stifel analyst Selman Akyol sees even better days ahead for the midstream partnership. He recently upgraded the PAA from ‘hold’ to ‘buy’ and raised the price target to $16 – implying 30% upside potential from current levels.
Pioneer Natural Resources (PXD)
Pioneer Natural Resources is an independent oil and gas exploration and production company with operations in the Midland Basin, a sub-basin of the Permian.
Thanks to sharp rises in oil and gas prices this year, the company has received a lot of attention from investors – the shares are up 37% year-to-date.
But it’s the size of the payout to Pioneer’s shareholders that sets it apart.
The company’s board recently declared a cash dividend of $8.57 per share for the third quarter. On an annualized basis, this translates to a yield of 13.3%
However, please note that Pioneer has a more variable base dividend policy. Your newly declared payout includes a basic quarterly dividend of $1.10 and a variable dividend of $7.47.
In other words, payments are not carved in stone. But if the energy commodity market remains strong, the company will likely continue to pay outsized dividends.
Mizuho Securities analyst Vincent Lovaglio has a ‘buy’ rating on Pioneer and a price target of $316 – about 23% above where the stock is today.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.