The world is shifting away from carbon fuels and toward cleaner alternatives, but it isn't making that switch at a rapid clip. That means that energy companies like Pioneer Natural Resources (PXD 0.73%) and Devon Energy (DVN 0.40%) are likely to have decades to reward investors for sticking around. That said, this pair of energy companies has a unique way of returning value to shareholders that is likely to lead to fast-rising share prices during the next industry upturn.
Energy is vital
Without access to cheap energy, the world would quickly plunge into a very undesirable state of affairs. Just look at what happens when electricity gets cut in a storm, and you'll understand the situation; life comes to a virtual standstill without energy. This is why the demand for oil and natural gas is expected to keep growing even as the world shifts toward cleaner alternatives.
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That's good news for drillers like Pioneer Natural Resources and Devon Energy, where the top and bottom lines are tied directly to the price of oil and natural gas. Meanwhile, a world that is in growth mode will likely see more demand for these fuels. More demand for energy should support prices, noting that the industry is highly cyclical. So, from a very basic perspective, if oil and natural gas prices are heading higher, then this pair of energy stocks should be performing pretty well, too.
But there's an important nuance to the story with Devon Energy and Pioneer Natural Resources. Companies like ExxonMobil (XOM -0.21%) (which is rumored to be in talks to buy Pioneer) and Chevron focus on providing a reliable and growing dividend, which attracts conservative dividend investors. That's great, and both of these companies have decades of annual dividend increases under their belts. Although a fairly recent shift in policy, Devon and Pioneer take the exact opposite approach, offering investors variable dividends.
The bad and the good
To put some numbers on this, Devon Energy's dividend payment has fallen for two consecutive quarters. Pioneer Natural Resources has also cut its dividend twice. Devon Energy's stock is down around 30% or so from its 52-week high, while Pioneer is off by 20% or so following a rally related to the above-noted rumors of a potential acquisition by Exxon. This is the downside to a variable dividend since falling energy prices and a falling dividend both take their toll on investor sentiment.
The upside, however, sees a benefit from improving sentiment as rising oil and natural prices lead to improved financial performance and higher dividend payments. Pioneer's dividend peaked in the third quarter of 2022 at $8.57 per share, up from the first quarter payment of $3.78. Devon's first-quarter 2022 dividend payment was $1.00 per share and peaked in the third quarter of that year at $1.55. Clearly, there's a lot of upside to the dividends here when times are good.
What all of this means is that if a good economy leads to solid energy prices, investors could push Devon Energy and Pioneer Natural Resources sharply higher. That's what happened between the energy market's nadir in 2020 and the recent industry peak in 2022. Put simply, these two stocks handily outperformed Exxon and Chevron, which are focused on being reliable dividend payers.
Not for everyone
If you need consistent dividends, don't even look at Devon Energy and Pioneer Natural Resources (at least not for now, their boards could alter their variable dividend policies in the future). However, if you are looking to leverage yourself to an energy market upturn, then they could be exactly what you are looking for. And, assuming the next bull market comes along with a strong economy and solid energy demand, there's every reason to believe that this pair could see another round. Assuming the energy sector is rising during the next bull market, Pioneer and Devon should be big winners of heady stock price appreciation.
