3 Reasons This Oil Stock Surged 42.7% in the First Half of 2021

What happened

Shares of Pioneer Natural Resources (NYSE:PXD) rocketed 42.7% in the first half of 2021, according to data provided by S&P Global Market Intelligence. Rallying oil prices, a mega acquisition, and a new dividend policy that will mean more money in the hands of shareholders as oil prices rise drove Pioneer shares higher.

So what

After increasing its dividend in early February for the fourth consecutive year, Pioneer launched a new variable dividend policy later in the month under which it plans to distribute up to 75% of its previous year’s free cash flow (FCF) in dividends every year, over and above its base dividend. Pioneer will pay out dividends under the new policy from next year onward, and it expects to pay up to 50% of 2021 FCF next year.

But here’s where things get interesting. Pioneer projected 50% FCF payout in 2022 assuming average WTI oil price of $42 per barrel. With the price of oil hovering around $70 per barrel as of this writing, shareholders can expect an even bigger windfall.

Image source: Getty Images.

Moreover, Pioneer expects to generate an incremental $5 billion in FCF through 2026 from its recent DoublePoint Energy acquisition, which could mean even bigger variable dividends for shareholders.

In fact, during its first-quarter earnings call in May, when Pioneer shares were trading at around $160 apiece, management estimated its potential FCF growth and variable dividends could boost the stock’s dividend yield to 4% in 2022 and 8% or more by 2026 at its stock price at the time. For perspective, Pioneer shares are hovering around $140 as of this writing and yielding 1.6%.

Not surprisingly, investor sentiment about Pioneer has remained high in recent months.

Now what

Pioneer’s upcoming second-quarter earnings report in early August should be an interesting one, as it’ll give investors an idea about DoublePoint’s contribution to the company. The $6.4 billion acquisition has made Pioneer the largest producer in the Permian Basin and should add substantial value to its earnings and cash flows.

So Pioneer Natural Resources shares may have cracked double digits in July on a broader sell-off in the oil and gas industry, but its dividends won’t disappoint even if oil prices fall. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.