The 8 Best Dividend-Paying Oil Stocks For 2019 And Beyond

Oil stocks are very popular in the income-oriented investing community, primarily thanks to the generous dividends that many of these stocks offer. However, as the energy sector is highly cyclical, investors should be careful before purchasing energy dividend stocks.

Investing in this sector becomes even more complicated by the fact that the market always discounts the future prospects of these stocks to some extent. As a result, energy stocks will sometimes appear remarkably cheap or expensive on a valuation basis, when they are actually the opposite.

Nevertheless, while the energy sector requires special attention in the due diligence process, it includes some of the best opportunities in the stock market for high dividend yields and total expected returns.

Energy Transfer (ET)

Energy Transfer was formed in October-2018 by the acquisition of Energy Transfer Partners (previously ETP) by Energy Transfer Equity (previously ETE). The combined entity owns and operates one of the largest portfolios of energy assets in the U.S.

Its facilities gather and transport natural gas and crude oil while the company also has one of the largest planned LNG export facilities in the country.

Energy Transfer has the advantage of operating with a fee-based model. It generates 85%-90% of its revenues from fees, which provide reliable cash flows, as the customers have to pay a minimum amount to Energy Transfer regardless of the actual quantities they transport and store.

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ET Segments

Source: Investor Presentation

Moreover, after the merger of the aforementioned two entities, Moody’s has revised its credit rating to stable (Baa3 investment grade). Furthermore, the combined entity expects to achieve a distribution coverage ratio of 1.7-1.9, which is remarkably high for a master limited partnership.

Therefore, the 8.1% distribution yield of Energy Transfer is attractive. In the absence of a downturn in the energy sector, this exceptional yield seems to be safe.

Energy Transfer was only recently shaped in its current form, it does not have a reliable performance record. As a result, the distribution of Energy Transfer cannot be considered safe in the event of a recession or a downturn in the energy sector.

Energy Transfer is working to improve its distribution safety. It reported a distribution coverage ratio of 1.90x in the 2018 fourth quarter and 1.74x in 2018.

Both figures are adjusted for the impacts of the ETE-ETP merger. This means the company generated 74% more distributable cash flow than it paid out to investors last year.

Energy Transfer’s distribution payments appear sustainable for the foreseeable future. Those who have strong conviction in the continuing growth of the U.S. economy are likely to greatly benefit from the stock, mostly thanks to its exceptional distribution yield.

Canadian Natural Resources (CNQ)

Canadian Natural Resources operates in the exploration, production, marketing and sale of crude oil, natural gas liquids (NGLs) and natural gas. It is headquartered in Calgary, Alberta.

The company boasts of having high-quality reserves, with long life and low decline rates. This is evident from its remarkably low breakeven point of free cash flow (including dividends), which is an oil price of $39 per barrel.

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CNQ Overview

Source: Investor Presentation

Canadian Natural Resources exhibits strong business momentum right now. In the most recent quarter, the company achieved record third-quarter funds flow from operations of $2.83 billion, which was 5% higher sequentially and 69% higher than prior year’s quarter.

The strong performance resulted from increased oil prices and growth in liquids production. Moreover, management expects to grow production per share by 7.5% per year on average until 2022. This growth rate for so many years is much higher than the growth rate of the well-known oil majors, such as Exxon Mobil and Chevron.

On the other hand, as Canadian Natural Resources is an almost pure upstream energy company, its results are greatly affected by the underlying commodity prices, which are beyond the control of the company.

This was evident in the downturn of the energy sector between 2014 and 2017, as the earnings of the company evaporated in 2015 and 2016.

Investors should keep the vulnerability of the company to low commodity prices in mind, as the company is less integrated and thus more vulnerable than the oil majors.

Overall, in the absence of a downturn, Canadian Natural Resources is likely to highly reward its shareholders thanks to strong production growth and its decent dividend yield, which currently stands at 3.5%. Nevertheless, the company is more sensitive to the gyrations of commodity prices than the integrated oil majors.

Imperial Oil (IMO)

Imperial Oil is one of Canada’s largest integrated oil companies and operates in three segments: Upstream, downstream and chemical. Exxon Mobil owns approximately 70% of Imperial Oil.

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Kurt Benson 7 months ago Member's comment

How do you always find such great picks?