Energy was the S&P 500’s top-performing sector last year. And this 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 investing legend profited handsomely from the energy boom: Warren Buffett.
Buffett’s Berkshire Hathaway backed the truck on oil and gas giant Occidental Petroleum ( OXY ) after the company’s earnings call in late February. Buffett read the transcript and liked what he saw.
“We started buying on Monday and bought everything we could,” he told CNBC.
Later, Buffett bought more – a lot more.
According to the latest SEC filing, Berkshire now owns 188.4 million shares of OXY, worth $14 billion. That makes OXY Buffett the sixth largest holding.
A bet from 2019
In 2019, Berkshire spent $10 billion on Occidental preferred stock to help the company buy fellow Houston-based energy producer Anadarko Petroleum.
Occidental pays an 8% annual dividend on this preferred stock, providing Berkshire with $200 million each quarter in dividend income.
The deal also gives Berkshire warrants to buy 83.9 million shares of Occidental common stock at an exercise price of $59.62.
“It’s also a bet on the fact that the Permian Basin is all that’s cracked,” Buffett told CNBC in 2019, adding that “If [oil] it goes up a lot, you make a lot of money.”
Here are two more Permian Basin energy plays to consider — also paying big dividends.
Plains All American Pipeline (PAA)
With high oil and gas prices, producers are making money. But when it comes to returning cash to investors, medium voltage operators are also worth a look.
Check out Plains All American Pipeline, a master limited liability company with an extensive network of pipeline gathering and transportation systems. The partnership says it aims to “increase its distribution to Shareholders over time through a combination of organic and acquisition-oriented growth.”
PAA’s assets are strategically located with critical crude oil gathering and transportation infrastructure from the Permian Basin. In the second quarter, the partnership completed the $42 million Permian Basin acquisition of the remaining 50% of the Advantage JV pipeline.
Earlier this year, management increased PAA’s quarterly 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 deep in the red year to date, PAA is up 25% in 2022.
Stifel analyst Selman Akyol sees even better days ahead for the midstream partnership. He recently upgraded PAA from “hold” to “buy” and raised his price target to $16 — implying a potential upside of 30% 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 strong rallies in oil and gas prices this year, the company has received a lot of attention from investors – shares are up 37% year-to-date.
But it’s the sheer size of Pioneer’s shareholder payout that makes it stand out.
The company’s board of directors recently declared a dividend of $8.57 per share for the third quarter. On an annualized basis, this translates to a return of 13.3%
However, note that Pioneer has a base plus variable dividend policy. Its recently reported payout includes a basic quarterly dividend of $1.10 and a variable dividend of $7.47.
In other words, the payments are not set in stone. However, if the energy commodity market remains strong, the company will likely continue to distribute 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. Provided without warranty of any kind.