Oil and natural gas prices have retreated in recent weeks. Oil prices are down 7% since July 1; natural gas prices are down 8%. Still, year to date, oil is up 25%; natural gas is up 17%.
When energy prices began to rise earlier this year, investors – still somewhat skittish – piled into the best-of-breed energy companies first. Exxon Mobil (NYSE: XOM) was first choice for many investors. Exxon Mobil shares are up 20% year to date. Exxon Mobil’s annual dividend yield, in turn, is down to 3.2%.
Exxon Mobil is a great company, to be sure. That said, I think it’s worthwhile to venture out beyond Exxon Mobil for additional yield. I say that because I don’t see much more risk associated with venturing out. On the other hand, I do see considerably more yield.
A 3.2% dividend yield is a nice yield for a solid, reliable dividend grower like Exxon Mobil. I think an 11% yield and a 6.7% yield are even nicer. Of course, there is no free lunch: The two energy companies I’m about to recommend are more risky than Exxon Mobil, but they’re not egregiously more risky. The extra income more than compensates for the extra risk in these high-yield energy stocks.
High-Yield Energy Stocks: Gas Pipelines
If you’re in the market for big yield, Energy Transfer Partners (NYSE: ETP) is worth considering. It’s one of the top natural gas pipeline partnerships in the country. ETP’s unit price has doubled since mid-February (though it had been halved in the fourth quarter of 2015), yet the distribution still yields over 11%. The high yield points to a value entry price if the distribution is sustained.
I think the distribution will be sustained. Rising natural gas prices will certainly help ETP’s production customers. The continual switch to natural gas from coal for electricity generation will further help sustain ETP’s pipeline volumes.
ETP defied its naysayers by maintaining its $1.055 per-unit distribution when energy prices cratered in late 2015 and early 2016. Now with natural gas prices trending higher, ETP will be better positioned financially to maintain its distribution going forward.
Big Energy Stock With 6.7% Yield
British energy giant BP PLC (NYSE: BP) shares yield 6.7%. This is among the highest yields in big energy.
Like Energy Transfer Partners, BP has defied its detractors and maintained its quarterly dividend. With oil price and natural gas prices well off their 2016 lows, BP is all but assured of maintaining its ample payout.
BP’s share price will be bolstered further by reduced uncertainty. The worst is behind BP and the 2010 Deepwater Horizon oil spill and tragedy. Most of the costs associated with Deepwater have been settled. Earlier this year, a U.S. District Court approved BP’s $20 billion settlement with the US government and the Gulf states. The settlement will be paid in $1.1 billion annual installments over the next 18 years.
On the operational side, BP is performing. It reported first-quarter 2016 operating cash flow of $3 billion, an improvement over the $2.5 billion operating cash flow from the year-ago quarter. The improvement comes despite weaker oil prices. With oil prices on the rise, I expect operating cash flow to rise as well.
BP has also stepped up its investment in liquefied natural gas. Last month, management approved an additional $8 billion to expand its Tangguh LNG project in Indonesia. It’s a good use of resources. BP should realize a high return on its investment. Growth in the region will be driven by increased LNG demand in India and China.
India’s natural gas demand is expected to grow at a 17% average rate through 2020 (which means demand will essentially double). India’s LNG imports were up 40% year over year in May. Since the beginning of the year, LNG imports are up 41%.
As for China, LNG demand is destined to trend higher. LNG imports are expected to grow at a 15% annual rate over the next five years. In May, China’s LNG imports increased 27% year over year. Incremental demand is up 20% for 2016.
As the demand for LNG in both India and China rises, the supply gap in the LNG market will expand. BP’s presence in Southeast Asia ensures it is as well-placed as any energy company to fill the gap.
If oil prices continue to hold above $40/barrel and natural gas prices above $2.50 per mmBTU, I see no reason to doubt Energy Transfer Partners’ or BP’s ability to maintain their respective high-yield payouts. (Of course, these two are far from the only high-yielders you can count on for growing income. Many others can be found right here.)