Dividend Investors: 2 Energy Stocks Are Returning More Cash

Investors can feast on the rising dividends of two energy stocks whose growing free cash flows could lead to more dividend hikes in 2022.

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Canadian energy companies are flush with cash, and multiple dividend hikes this year are possible if the surge of oil prices doesn’t stop. Tourmaline Energy (TSX:TOU) could be the pacesetter, as its increase came earlier than expected. Vermilion Energy (TSX:VET)(NYSE:VET) has reinstated its dividend and is about to make the first payout after two years of non-payment.

The energy sector has made an incredible turnaround in 2021 after a forgettable oil slump in 2020. Thus far, in 2022, the demand for oil is outpacing supply. The Russia-Ukraine war could send crude prices higher because of supply disruptions. Meanwhile, free cash flows are booming among industry players. Also, several companies are likely to accelerate their share buybacks.


On March 7, 2022, Tourmaline Oil announced an 11% hike to its base dividend. While the dividend yield is a modest 1.61%, RBC Capital Markets analysts predict a couple of hikes is coming this year. The $15.89 billion oil and natural gas producer also declared a special dividend ($1.25 per share) recently, the second time since October 2021.

Anthony Petrucci of Canaccord Genuity has a buy rating for this energy stock. He expects quality producers to follow Tourmaline’s lead. Petrucci added that many energy stocks will have free cash flow yields of over 20% or amounts equivalent to one-fifth of their total market value.

As of this writing, current investors enjoy a 32.03% year-to-date gain. At $52.43 per share, the trailing one-year price return is 146.78%. The 12-month average price target of other market analysts is $66.46 (+26.8%).  

In Q4 and full-year 2021, total revenue increased 488% and 492%, respectively, versus the same periods in 2020. The highlights, however, were the 58% and 228% year-over-year increases in net earnings. Tourmaline’s free cash flow for the year was a record $1.49 billion.

Reinstatement of dividends

Investors should welcome the decision of the board of directors of Vermilion Energy to reinstate the dividend. The approval was justified, considering the 304% increase in free cash flow ($545 million) in 2021 versus 2020. Also, cash flows from operations grew 66.8% year over year to $834.45 million.

In 2021, the top line increased 85.8% compared with the previous year, while net earnings reached $1.14 billion. Vermilion Energy incurred a net loss of $1.51 billion in 2020. Furthermore, the average annual production of 85,408 barrels of oil equivalent per day (boe/d) for the year was at the top end of management’s revised guidance.

The $4.58 billion petroleum and natural gas producer considers 2021 a transformational year. Its balance sheet was overleveraged at the start of the year in that net debt reduction became the topmost financial priority. Management had a modest capital budget to preserve liquidity, maximize free cash flow, and reduce debt. The strategy was successful and aided by the favourable pricing environment.

As of March 7, 2022, the energy stock is riding high with its 77.67% year-to-date gain. At $28.25 per share, the dividend offer is 0.21% for now. Besides its target to hit $1.2 billion in net debt by the back half of 2022, dividend hikes, special dividends, and share buybacks are under evaluation.

Positive and negative impacts

Energy companies are enjoying rising cash flows in Q1 2022. Unfortunately, the continuous rise of commodity prices will hurt consumers and households.   

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. 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, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends VERMILION ENERGY INC.

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