A drop in oil prices from $115 to under $80 in six months is monumental. Investors are dumping anything oil related. But have they thrown the baby out with the bath water?
The key lesson of today’s investment environment should be that not all oil and gas stocks are created equal.
As cliché and overused as it sounds, here’s the way I see the oil industry today, “The time to buy is when there’s blood in the streets.”Baron Rothschild said that back in the 18th century, but it’s a time-tested strategy, especially in investing.
You have to have a steel stomach to buy small cap oil and gas exploration and production companies these days. But one of the no-brainers should be buying major integrated oil and gas companies on the pullbacks.
Those guys can control capital expenditures a lot easier than smaller operators. They can redeploy capital to higher margin areas of the oil and gas market, while leaving projects closely tied to oil idle.
When oil went from $140 a barrel to $40 a barrel in 2008-2009, all five major oil and gas companies mentioned below kept making money.
In fact, most were still generating double-digit returns on equity. And all kept paying a dividend, while a few actually increased their dividend payments even as oil stayed below $60 a barrel for more than half a year.
What’s more is that because of the recent sell-off in anything oil related, the major oil and gas companies are offering the highest dividend yields we’ve seen in years.
That said, not every major integrated oil and gas company is created equal.
Investors are likely enticed by Colombia’s major integrated oil and gas company, Ecopetrol SA (NYSE: EC).
This $40 billion market cap company offers a dividend yield of 11.5%, the highest it’s ever been. However, investors should exercise extreme caution when chasing high yields.
Ecopetrol has a spotty history of dividend payments and only pays them out once a year. What’s more, all of the company’s profits currently go toward its dividend.
That’s why we’re sticking to the companies with solid balance sheets and a history of steady dividend increases. With that, let’s dig into the top five energy stocks offering the best income in years:
No. 1 High-Yield Energy Stock: Exxon Mobil Corporation (NYSE: XOM)
Really, this Dividend Aristocrat needs no introduction. I could just tell you that it offers a 3% yield, has increased its dividend payment for 31 straight years and that it’s only paying out 36% of its earnings in the form of dividends.
But just to drive the point home, consider the sheer size of Exxon Mobil, which trades with a $390 billion market cap and has more assets on its balance sheet than the market caps of IBM, Intel or McDonald’s.
Although shares are down only 6% over the last three months, it’s still trading at an attractive valuation at a price-to-earnings ratio of 14 based on next year’s earnings estimates. Exxon has long been a“flight-to-safety” trade given its size and stability. It’s also been a staple of Warren Buffett’s portfolio since early 2013.
No. 2 High-Yield Energy Stock: Chevron Corporation (NYSE: CVX)
I recently highlighted Chevron as one of the top five must-own Dividend Aristocrats for 2015. That’s right, Chevron has also increased its dividend for more than 25 years in a row — racking up a 28-year streak of dividend increases.
Chevron’s yield is up to 3.8% after its stock price fell 12% over the last three months. Chevron should be one of the big beneficiaries of the current market environment. Part of this is due to its very strong balance sheet and cash hoard, which will allow Chevron to take advantage of the “blood in the market”(e.g. buy up other oil and gas companies for cheap).
No. 3 High-Yield Energy Stock: Royal Dutch Shell PLC (NYSE: RDS.A)
Royal Dutch Shell is down more than 15% in the last three months. That’s the bad news. The good news is its yield is now a solid 4.3%, paying out just under half of earnings via dividends.
Despite taking a break from dividend increases from 2009 to 2012, Royal Dutch is back on track. Prior to 2009, Royal Dutch Shell was a solid dividend booster. And it has now upped its dividend for two straight years.
Royal Dutch Shell is still somewhat of a turnaround story. It’s in the process of restructuring underperforming assets, including revamping its onshore business in North America.
No. 4 High-Yield Energy Stock: Total SA (NYSE: TOT)
Total is the France-based oil and gas giant. Little known, it has a $130 billion market cap and offers a solid 4.6% yield. Though Total’s quarterly dividend payouts have been less consistent than Exxon’s or Chevron’s, it has managed to increase its dividend 30% in the last two years alone.
All in all, Total is an interesting play on European oil and gas, as the company has been heavily investing in new projects over the last few years. Nearly half of its capital expenditures have been going to projects that aren’t producing any oil and gas yet.
Many of those projects are expected to come online in the next couple years. And as Total curtails capital expenditures and finally sees production from its new projects, that’ll mean more cash flow for a steadier dividend.
No. 5 High-Yield Energy Stock: BP PLC (NYSE: BP)
Last but certainly not least is BP, which offers the highest dividend yield of our five energy stocks at just over 6%.
Remember that BP is still battling the Deepwater Horizon hangover from 2010. Issues related to that public relations disaster resurfaced earlier this year; BP is down 14% year-to-date and the stock trades at a price-to-earnings ratio of less than 10 based on next year’s earnings estimates.
Despite the weakness in its stock price, BP continues to reward shareholders, having increased its dividend 17% in the last two years.
Eventually, oil prices will rise again. Until then, energy investors should stay diversified and invest in companies that know how to weather a major oil selloff.
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