Business tycoon John D. Rockefeller, with keen interest in the oil industry, once said, “Do you know the only thing that gives me pleasure? It's to see my dividends coming in.”
The easiest way to analyze a company’s fundamentals is to consider its dividend payment history as steady and consistent dividends can be paid only after meeting all business obligations.
The business scenario for both upstream and midstream energy players is quite favorable as oil is trading well above $65 a barrel and U.S. plays are facing bottleneck in transportation capacity. Hence, it is the ideal time to load up on energy stocks as such companies are likely to maintain impressive dividend payouts.
Oil Springs Higher
Per the U.S. Energy Information Administration (EIA), the average monthly price of West Texas Intermediate crude has traded well above the $60-a-barrel psychological mark over the first four months of 2018. The commodity traded at an average price of $63.70, $62.23, $62.73 and $66.25 in January, February, March and April, respectively.
On May 8, Trump nixed the Iran nuclear deal, putting a lot on the line. Eventually, WTI crude price crossed the $70 mark to scale the highest point since November 2014 in the wake of concerns that Iran’s crude export might fall. Trump also insisted that Iran should refrain from developing nuclear weapons and disengage from the civil war in Syria.
Venezuela also faces the risk of U.S. sanctions. The country, touted to be among the biggest oil producers in Latin America, has been witnessing a steep decline in crude production. Last year, the country reported the lowest oil production in a decade. Hence, sanctions on Venezuela will dent the country’s output further, weighing on the already-tightened global crude supplies.
In other words, fears of sanctions on Iran and Venezuela have been largely backing the oil recovery.
Room for More Dividends
EIA expects WTI crude to average $66 per barrel in 2018, painting a favorable picture for explorers who have raked in profits at prices way below $60 as well.
Our proprietary model shows that the trailing 12-month net operating cashflow of the Oil-Energy sector at the end of first-quarter 2018 was $12.3 billion, easily financed the capital spending of $5.8 billion. This has created free cashflow of $6.5 billion, out of which $2.6 billion was paid as dividends.
Returning cash back to shareholders is rooted in energy companies’ initiatives to steadily pay out dividends under investor pressure. With more explorers flocking to U.S. shale plays, demand for midstream infrastructure is on the rise. Also, more crude pipelines will likely be constructed in the Permian as the basin has been facing labor shortage and low pipeline capacity.
Focus on Dividend Oil Stocks
Given the favorable oil price scenario as well as strong demand for transporting and storing fresh crude volumes, the focus should be on upstream and midstream energy players at the moment. Here, we are picking energy stocks that have already been paying out handsome dividends yields.
Companies giving impressive dividend yields generally boast strong fundamentals. In other words, it is always better to focus on energy stocks with strong fundamentals as they are more likely to continue paying impressive yields in the days ahead.
Picking the Right Way
Selecting dividend stocks is not quite a daunting task. Investors should take a close look at the past financial statement and price performance of companies. It could happen that a company which has paid high dividends in the past may struggle to maintain the trend.
Here, our proprietary Stock Screener comes in handy. With this tool, we have selected four energy stocks with either a Zacks Rank #1 (Strong Buy) or 2 (Buy). These companies have also been paying higher dividend or distribution (in case of partnerships) yields than the S&P 500 index.
Headquartered in London, BP plc BP is among the leading integrated energy players in the world. The company has a strong portfolio of upstream projects which has been backing impressive production growth. The British energy giant is committed toward supporting the U.S. economy with extensive presence in the country.
The current dividend yield of the firm is 5.4%, significantly higher than S&P 500’s 1.8%. BP sports a Zacks Rank #1.
Occidental Petroleum Corporation OXY, headquartered in Houston, TX, is one of the leading oil and gas explorers. The company also has a strong presence in midstream energy businesses.
It currently has dividend yield of 3.7% and carries a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Based in Oklahoma City, Enable Midstream Partners, LP ENBL is a master limited partnership with extensive midstream energy assets.
The partnership, with Zacks Rank #2, has a distribution yield of 8.2%.
Based in Leawood, KS, Tallgrass Energy GP, LP TEGP primarily provides services related to transportation of crude in the domestic market.
This #2 Ranked stock pays out a rewarding distribution of 9.4%.
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