Warren Buffett keeps backing up the truck on big oil. Lock in energy yields up to 13.3% for some fat income to boot

Energy was the top-performing sector of the S&P 500 last year. And that momentum has carried into 2022.

Year to date, the Energy Select Sector SPDR Fund (XLE) is up 37%, in stark contrast with the S&P 500’s 17% drop.

One investing legend has benefited nicely from the energy boom: Warren Buffett.

Buffett’s Berkshire Hathaway backed up the truck on oil and gas giant Occidental Petroleum (OXY) after the company’s earnings conference call held in late February. Buffett read the transcript and liked what he saw.

“We started buying on Monday and we bought all we could,” he told CNBC.

Later on, Buffett bought more — a lot more.

According to the latest SEC filing, Berkshire now owns 188.4 million shares of OXY, worth a whopping $14 billion. That makes OXY Buffett’s sixth-largest holding.

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A bet since 2019

In 2019, Berkshire spent $10 billion on Occidental preferred shares to help the company purchase its fellow Houston-based energy producer Anadarko Petroleum.

Occidental pays a dividend of 8% annually on that preferred stock, providing Berkshire with $200 million each quarter in dividend income.

The arrangement also gives Berkshire warrants to purchase 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 what it is cracked up to be,” Buffett told CNBC in 2019, adding that “If [oil] goes way up, you make a lot of money.”

Here are two more Permian Basin energy plays to think about — they pay hefty dividends, too.

Plains All American Pipeline (PAA)

With strong oil and gas prices, producers are making money hand over fist. But when it comes to returning cash to investors, midstream operators also deserve a look.

Check out Plains All American Pipeline, a master limited partnership with an extensive network of pipeline gathering and transportation systems. The partnership says that its goal is to “increase its distribution to Unitholders over time through a combination of organic and acquisition-oriented growth.”

PAA’s assets are strategically located, with critical crude oil gathering and takeaway infrastructure from the Permian Basin. In Q2, the partnership completed a $42 million Permian Basin bolt-on acquisition of the remaining 50% interest of the Advantage JV pipeline.

Earlier this year, management raised PAA’s quarterly distribution by 21% to $0.2175 per unit. At the current unit price, the stock yields a generous 7.5%.

While the broad market is deep in the red year to date, PAA climbed 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 the price target to $16 — implying a potential upside of 38% from the 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 subbasin of Permian.

Thanks to the strong rallies in oil and gas prices this year, the company received a lot of investor attention — 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 recently declared a cash dividend of $8.57 per share for the third quarter. On an annualized basis, that translates to a yield of 13.8%

However, note that Pioneer has a base-plus-variable dividend policy. Its newly-declared payout includes a $1.10 base quarterly dividend and a $7.47 variable dividend.

In other words, the payouts are not carved in stone. But if the market for energy commodities remains strong, the company will likely continue dishing out oversized dividends.

Mizuho Securities analyst Vincent Lovaglio has a ‘buy’ rating on Pioneer and a price target of $316 — around 28% above where the stock sits today.