EC The Top 10 Oil Stocks For Rising Oil Prices

Finally, it is important to note that Chevron and Exxon Mobil are the only two Dividend Aristocrats in the energy sector. As this sector is highly cyclical, it is extremely hard for the companies to maintain multi-year dividend growth streaks. This is a testament to the long-term business perspective of the company.

Chevron currently offers a 3.8% dividend yield and is expected to announce its next dividend hike in January. Therefore, those who purchase the stock at its current price are likely to enjoy an approximate 4.0% forward dividend yield. Moreover, thanks to the healthy balance sheet of the oil major and its strong free cash flows, the dividend can be considered safe for the foreseeable future.

The following YouTube video discusses Chevron’s dividend safety in greater detail following the company’s most recent earnings report:

Video Length: 00:08:15

Furthermore, the stock is trading at a price-to-earnings ratio of 16.8, which is higher than its average valuation level of 15.8. If the stock reverts to its average valuation level over the next five years, it will incur a 1.2% annualized drag on its returns.

Therefore, given the 3.8% dividend and 7.5% annual earnings-per-share growth, Chevron is likely to offer a 10.1% average annual return over the next five years.

Top Oil Stock #7: BP plc. (BP)

BP is one of the largest oil and gas companies in the world. It operates in two segments: upstream and downstream (mostly refining).

BP has greatly suffered from its disastrous accident in the Gulf of Mexico, in 2010. The company has paid $65 billion for this accident so far. This amount is almost equal to all the earnings of the company since then. While most investors think that this accident belongs to the past, BP paid $3.2 billion for the accident last year (25% of its earnings) and expects to pay another $2.1 billion this year.

Due to the unprecedented extent of asset sales in the aftermath of the accident, BP failed to grow its production until 2017. However, thanks to a series of growth projects, it has returned to strong growth mode in the last two years. Since 2016, BP has launched 23 major projects online.

Even better, it has another 12 major projects until the end of 2021. Thanks to these projects, the oil major expects to add about 900,000 barrels per day to its current production of 3.8 million barrels per day.

Source: Investor Presentation

BP has reduced its breakeven point below $50 per barrel and expects to lower it even further, to $35-$40 over the next two years. We expect BP to grow its earnings per share by 5.0% per year on average over the next five years.

It is also important to note that BP is particularly suitable for income-oriented investors thanks to its extremely shareholder-friendly management. While the company was forced to suspend its dividend after its disastrous accident amid public outrage, it restored its dividend just three quarters later.

In the recent downturn of the energy sector, BP maintained its dividend, which amounted to $7.0 billion per year, even though it failed to make a profit during 2015-2017. In other words, BP has repeatedly proved that the dividend is near the top of its capital allocation priorities. Therefore, the 6.3% dividend can be considered safe, particularly given the promising growth prospects of the company.

BP stock is trading at a price-to-earnings ratio of 11.1, which is lower than our assumed fair earnings multiple of 12.0. If the stock reverts to its average valuation level over the next five years, it will enjoy a 1.6% annualized boost in its returns. Therefore, given the 6.3% dividend and 5.0% expected annual earnings-per-share growth, BP is likely to offer a 12.9% average annual return over the next five years.

Top Oil Stock #6: Exxon Mobil (XOM)

Exxon Mobil is the largest publicly-traded oil company in the world. It is a mega-cap stock, with a current market cap of $312 billion. It is more integrated and diversified than most of the oil majors. As a result, it is more defensive than most of its peers during downturns but it benefits less than them from rising oil prices.

Exxon has disappointed its shareholders for a whole decade, as it is the only oil major that has failed to grow its production. It currently produces 4.0 million barrels per day, the same amount it was producing back in 2008.

In addition, its earnings per share are expected to plunge 30% this year, primarily due to lackluster oil prices but also due to depressed margins in its chemicals segment. The earnings of this segment plunged 80% in the most recent quarter.

However, Exxon seems to have eventually changed course, as it announced a major shift in its strategy early last year. The company will nearly double its annual capital expenses in the upcoming years in order to pursue growth more aggressively. Thanks to this strategic shift, Exxon expects to grow its production from 3.8 million barrels per day in 2018 to 5.0 million barrels per day in 2025.

The major growth drivers will be the Permian Basin and Guyana. In the Permian, Exxon expects to produce about 1.0 million barrels per day by 2024. This level of output is certainly impressive, as it represents 25% of the current output of the company.

Exxon has particularly exciting growth prospects in Guyana. While other companies have drilled about 40 dry holes in the area, Exxon has posted an impressive 87% exploration success rate in the area thanks to its expertise. Due to these new discoveries, the oil major has almost doubled its estimated reserves in the area since early last year, from 3.2 to 6.0 billion barrels now. Exxon expects to produce about 750,000 barrels per day in Guyana by 2025.

Exxon expects to grow its earnings per share by 135%, from $3.59 in 2017 to $8.44 in 2025, assuming an oil price of $60 in 2025.

XOM Growth

Source: Investor Presentation

The above chart shows that Exxon will benefit even more if the oil price averages $80 in 2025, as the oil major expects to grow its earnings per share by 225% in such a scenario. We have adopted the conservative scenario of oil at $60 per barrel and thus expect Exxon to earn approximately $7.80 per share by 2024 for a 17.4% average annual growth rate.

As mentioned earlier, Exxon is one of the two Dividend Aristocrats in the energy sector, as it has raised its dividend for 37 consecutive years. This enviable dividend growth streak is a testament to the defensive nature of the company, which has kept growing its dividend even under the most adverse business conditions, assisted by its rock-solid balance sheet.

We believe Exxon Mobil’s dividend is among the safest of all oil stocks. The following video analyzes Exxon Mobil’s dividend in further detail:

Video Length: 00:08:25

The current 4.7% dividend yield is certainly attractive and can be considered safe. However, the stock is trading at a price-to-earnings ratio of 20.9, which is higher than our assumed fair earnings multiple of 13.0. If the stock reverts to its average valuation level over the next five years, it will incur a 9.1% annualized drag against its returns.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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