16 Dividend Income Opportunities In The Energy Minerals Sector, But Beware The Nature Of The Beast

Introduction

The Energy Minerals Sector is comprised of 619 companies. And, as it is with every sector, they come in all shapes, sizes and colors. However, a common attribute that is shared by most companies in this sector is a significant amount of cyclicality in their operating results, i.e., earnings and cash flows. As a result, capital appreciation results can be both unpredictable and even poor for extended periods of time. On the other hand, the dividend records of many companies in this sector, especially the Major Integrated Oil Producers tend to be more consistent and, in many cases, quite attractive.

Consequently, for the most part, companies in this sector tend to be more appealing to the dividend-oriented investor. In addition to good records of dividend growth, there are many opportunities to invest in Energy Minerals companies that offer above-market dividend yields. And as you will see in the portfolio review below, the dividend yields of most of the companies featured in this article are significantly above-market average.

Additionally, it would be valuable to recognize that FactSet only provides four primary subsectors to the Energy Minerals Sector. However, with this article I am only presenting companies in three of the four subsectors. My screen did not identify any company in the coal subsector that met my criteria. On the other hand, there were seven Integrated Oil Companies, six Oil Refining/Marketing and only two Oil and Gas Production companies that my screen identified as attractively valued.

Furthermore, there is one interesting attribute that I identified with the Integrated Oil Companies that is important to recognize. The operating performance (i.e. earnings) of the major integrated oil companies tend to be highly correlated and sensitive to the price of crude oil. In other words, where the price of crude oil goes the earnings of these companies tend to follow. To illustrate the high correlation and sensitivity to oil prices for the integrated oil companies I offer the following two graphs. The first is the price of crude oil since calendar year 2000. With the second graph I offer the operating earnings of Exxon Mobil Corp. over essentially the same timeframe. Note that Exxon Mobil Corp.’s earnings almost perfectly correlate to and follow the price of crude. This partially explains the cyclicality that I referenced above.

 A Sector By Sector Review

This is part 8 of a series where I have conducted a simple screening looking for value over the overall market based on industry classifications and subindustry classifications reported by FactSet Research Systems, Inc. In part 1 found here I covered the Consumer Services Sector. In part 2 found here I covered the Communication Sector. In part 3 found here I covered the Consumer Durables Sector and its many diverse subsectors. In part 4 found here I covered Consumer Nondurables. In part 5 found here I covered companies in the Consumer Services Sector. In part 6 found here I covered the Distribution Services Sector.  In part 7 found here I covered the Electronic Technology Sector. In this part 8 I will be covering the Energy Minerals Sector.

In each article in this series, I will be providing a listing of screened research candidates from each of the following industry sectors, the sector I’m covering in this article is marked in green:

Sector 8:  Energy Minerals

Oil & Gas Production

Integrated Oil

Oil Refining/Marketing

Coal

A Simple Valuation and Quality Screening Process

With this series of articles, I will be presenting a screening of companies that have become attractively valued primarily as a result of the bearish market activities experienced in 2018 from each of the above sectors. I will be applying a rather simple valuation and quality-oriented screen across each of the sectors. First, I have screened for investment-grade S&P credit ratings of BBB- or above. Next, I have screened for low valuations based on P/E ratios between 2 and 17. Finally, I have screened for long-term debt to capital no greater than 70%.

By keeping my screen simple, and at the same time rather broad, I will be able to identify attractively valued research candidates that I might have overlooked through a more rigorous screening process. In other words, I’m looking for fresh ideas that I might have previously been overlooking. Furthermore, I want to be clear that I do not consider every candidate that I have discovered as suitable for every investor. However, I do consider them all to be attractively valued. Additionally, I also believe that every investor will be able to find companies to research that meet their own goals, objectives and risk tolerances as this series unfolds

Sector 8: Energy Minerals

Oil & Gas Production

Integrated Oil

Oil Refining/Marketing

Coal

Portfolio Review: Energy Minerals Sector: 16 Research Candidates

FAST Graphs Screenshots of the 16 Research Candidates

The following screenshots provide a quick look at each of the 16 candidates screened out of over 19,000 possibilities. However, there are only 619 companies categorized as Energy Minerals, and these 16 were the only ones I was comfortable presenting in this article. The company descriptions are provided courtesy of the Wall Street Journal. In the FAST Graphs analyze out loud video that follows the screenshots, I will provide additional details and thoughts on the possible attractiveness as well as the potential negatives of each of these research candidates.

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Disclosure:  Long CVX and XOM

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell ...

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