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Thanks to the strong recovery of global oil consumption from the pandemic, as well as escalating geopolitical conflict, energy stocks are one of the top performing groups in the S&P 500 this year. The commodity price rally has been fueled by the recovery from the pandemic, as well as the limited oil production from OPEC and Russia.

These two factors have led the price of oil to rally to near $100 per barrel in the U.S., a multi-year high. In this article, we will analyze the prospects of three energy stocks that are offering attractive dividend yields.

BP plc (BP)

BP is one of the largest oil and gas corporations in the world based on its $100 billion market cap. It is a fully integrated company and operates in two segments: upstream and downstream (mostly refining).

In early August, BP reported (8/2/22) financial results for the second quarter of fiscal 2022. BP greatly benefited from the rally of the prices of oil and gas to 13-year highs and record refining margins thanks to the sanctions of Europe and the U.S. on Russia for its invasion in Ukraine. This development has rendered the oil and gas markets extremely tight. As a result, BP grew its earnings-per-share 36%, from $1.92 in the first quarter to $2.61. This level of earnings-per-share, which is the highest of BP in the last decade, exceeded analysts’ consensus by an eye-opening $0.48.

BP has exceeded the analysts’ consensus for six consecutive quarters. It also reduced its debt for a ninth consecutive quarter and reiterated that it expects to keep raising its dividend by 4% per year if the price of oil remains around $60 or higher. In such a scenario, BP also expects to repurchase $4 billion of shares per year (~4%). Thanks to its record earnings, BP raised its quarterly dividend by 10%. The stock currently yields 4.5%.

ConocoPhillips (COP)

ConocoPhillips is the world’s largest independent oil and gas producer, with a production of 1.7 million barrels per day and a market capitalization of $128 billion. Conoco is seeing strong growth, not just from higher oil prices but also from acquisitions. Last year, ConocoPhillips closed the acquisition of Concho Resources for $9.7 billion in an all-stock deal. This was the largest shale oil deal in 2020. ConocoPhillips pursued this deal thanks to the low production cost of Concho and the high rate of return of this deal. Also in 2021, ConocoPhillips announced its agreement to buy Shell’s Permian Basin assets for $9.5 billion in cash. The deal will increase the Permian output of ConocoPhillips by 40% and will result in great synergies, as the company will become the second-largest producer in the Permian, behind only Pioneer Natural Resources (PXD).

As ConocoPhillips is a pure upstream company that does not hedge its output, it greatly benefited from the rally of the oil price to a 13-year high due to the sanctions of western countries on Russia. In the second quarter, Conoco’s average realized oil price jumped 77% over last year’s quarter, and thus the company more than tripled its earnings-per-share, from $1.27 to $3.91. Thanks to its blowout earnings, ConocoPhillips will offer a special dividend of $1.40 per share (1.4%) in the third quarter, apart from the regular dividend of $0.42 per share. The regular annual dividend payout provides a 1.8% yield.

Phillips 66 (PSX)

Phillips 66 operates in four segments: refining, midstream, chemicals, and marketing. It is a diversified company with each of its segments behaving differently under various oil prices, in the absence of a severe recession.

In late July, Phillips 66 reported (7/29/22) financial results for the second quarter of fiscal 2022. The company enjoyed record refining margins, which resulted primarily from the sanctions of western countries on Russia for its invasion in Ukraine. Realized refining margins skyrocketed sequentially from $21.9 per barrel to $46.7 per barrel and thus the operating income of the refining segment grew from $140 million to $3.1 billion.

As a result, adjusted earnings-per-share jumped from $1.32 to an all-time high of $6.77, and exceeded the analysts’ consensus by an impressive $1.01. Management raised the dividend by 5%. Even better, refining margins have remained around record levels in the third quarter. Shares of PSX currently yield 4.4%.

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