Play a Safe Bet with Oil Integrated Majors: XOM, CVX, BP, RDS.A

Zacks

Oil integrated majors, Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) raised their dividends on Thursday, barely ahead of their quarterly financial reports. The energy behemoths, with respectable dividend yields of 2.5% and 3.2%, respectively, signify a haven for investors willing to play it safe.

Irving, TX-based largest U.S. oil and gas company Exxon Mobil raised its dividend by 9.5%, to 69 cents per share from 63 cents. The dividend will be payable Jun 10 to investors on May 13. Simultaneously, Chevron raised its dividend by 7% to $1.07 from $1.00 per share. It is payable on Jun 10 to shareholders as of May 19.

The focus on payout closely follows the payout raises by two other integrated majors across the Atlantic, namely, BP plc (BP) and Royal Dutch Shell plc (RDS.A), earlier in the week. The European oil majors currently offer a yield of 4.5% and 3.9%, respectively.

Integrated majors, through their focus on shareholder return, are once again reminding investors of their resilience in volatile market dynamics. The shifting focus, however, was pending as the integrated space has underperformed the overall energy space in the recent past. This has been aptly captured by the Dow Jones U.S. Integrated Oil & Gas Index (DJUSOL), which has underperformed the Dow Jones U.S. Oil & Gas Index (DJUSEN) by almost 4.5% year to date.

The large-cap integrated space in the recent past has faced a relatively flattish oil price movement together with rising capital expenditure, which failed to compensate for the cascading production levels. One direct fall out of rising capital spending was sharply falling free cash flow levels for the integrated majors. The sector, with a long gestation period of usually more than five years for new projects to perform optimally, also would mean the spending will not reflect improvements in earnings and cash flow in the near-term.

However, the space also offers investors insulation from volatile market dynamics owing to its relatively low-risk conglomerate business structure, fortress-like balance sheet, ample free cash flows even in a low oil price environment and growing dividends. Along with this, growing demand of the largest oil consumer U.S., would keep a check on any downside on the price of oil.

The immediate outlook for oil, however, remains positive given the commodity’s constrained supply picture. According to the Energy Information Administration (EIA), which provides official energy statistics from the U.S. Government, expects global oil demand to grow another 1.2 million barrels per day in 2014.

In our view, crude prices in the next few months are likely to exhibit a sideways-to-bearish trend, trading in the $90–$100 per barrel range. As North American supply remains strong and the groundbreaking agreement with Iran makes it easier for the country to sell the commodity, we are likely to experience a pressure in the price of a barrel of oil.

As such we believe that the integrated big oil players – all currently carrying a Zacks Rank #3 (Hold) – provide defensive strategy for energy investors willing to play it safe. The exclusive club of the six behemoths Exxon, Chevron, BP, Royal Dutch, Total SA (TOT) and ConocoPhilips (COP) currently has an average dividend yield of 3.2%, which far outweighs the average yield of 2.2% of the Dow Jones Industrial Average (DJI).

To read this article on Zacks.com click here.

Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.

Be the first to comment

Leave a Reply