Three Dividend-paying Oil Stocks to Buy Amid Heightened Prices
By: Paul Dykewicz,
Three dividend-paying oil stocks to buy bring opportunity for investors as U.S. “crude tanks” face shrinking stockpiles at a major U.S. storage site.
The three dividend-paying oil stocks to buy are brimming with potential fueled by crude prices surging into the $90-95 range to reach their highest level since August 2022. Oil supplies at a major storage hub in Cushing, Oklahoma, have been drained to their lowest level since July 2022, with U.S. West Texas Intermediate futures rising to $95.03 per barrel on Sept. 28, before pulling back from those levels that day to $91.74 at 4:21 p.m. and dipping to $91.79 on Friday evening, Sept. 29.
The shrinking surplus at Cushing-based crude tanks, America’s largest U.S. storage hub, is sending oil prices for near-term supplies surging. Stockpiles tumbled below 22 million barrels last week to the lowest mark since July 2022, according to U.S. government data. The crunch even is causing American crude to become pricey for Asian refiners.
Despite market headwinds of ongoing food and energy inflation, a potential partial government shutdown, an expanding auto strike and diplomatic failures in China and Iran, the market is trading better than most observers would expect, Perry wrote to his Cash Machine subscribers. It also explains why investors with a collective $5.5 trillion are content to collect 5%-plus in guaranteed short-term cash instruments and Treasuries, he added.
Paul Dykewicz interviews Bryan Perry at a MoneyShow.
Three Dividend-paying Oil Stocks to Buy and Why
The three dividend-paying oil stocks to buy offer both dividends and a chance for capital appreciation. Perry, who currently averages a dividend yield of 10.8% with Cash Machine’s 29 recommendations, closely monitors oil and other energy equities. His favorite oil stock, recommended on November 29, 2022, since then has soared 51.56%.
Investors can take heart that the Personal Consumption Expenditures (PCE) index data released by the U.S. Bureau of Economic Analysis on Sept. 29. The data showed overall inflation dipping below 4% on an annual basis. When excluding volatile food and energy prices, the latest rise in the key inflation gauge of the Federal Reserve was just 0.1%, a 3.9% increase from the same time span last year.
The data shows that consumer prices rose less than expected during August. Growth stocks traded up after the release of the inflation news, with bond prices positive and yields dipping, Perry opined. The result is that the “trading landscape” improved a bit, he added.
Three Dividend-paying Oil Stocks to Buy: Stocks or Funds?
Another oil industry follower is Bob Carlson, a pension fund chairman who also heads the Retirement Watch investment newsletter that features a variety of portfolios. As a risk-averse pension fund leader, Carlson often prefers funds to individual stocks to enhance diversification and reduce risk.
“For oil stocks, especially dividend-paying oil stocks, I recommend the ETF Energy Select SPDR (XLE),” Carlson advised me. “The fund owns 23 stocks and has 74% of the fund in its 10 largest positions. The holdings don’t change much, because XLE has a turnover ratio of only 9%.”
Top positions in the fund recently were Exxon Mobil (NYSE: XON), Chevron (NYSE: CVX), EOG Resources, Inc. (NYSE: EOG) Schlumberger NV (NYSE: SLB) and ConocoPhillips (NYSE: COP). XLE’s dividend yield of 3.61%. It is up 5.38% in the last four weeks, 16.55% over three months, and 8.29% for the year to date. The fund has 99% of its portfolio in U.S. energy companies.
Bob Carlson, head of Retirement Watch, gives an interview to Paul Dykewicz.
Three Dividend-paying Oil Stocks to Buy: ExxonMobil
ExxonMobil’s “product solutions” business recently provided a progress report halfway through its eight-year strategy for its combined downstream and chemicals businesses. BofA Global Research’s latest research note on the stock showed the oil giant is ahead of its management’s current plan of expecting to almost triple earnings from 2019 through 2027.
“While this seems to be a haircut by the market on imprecise visibility, management has provided a new level of transparency that suggests it is about 60% of the way there, with an incremental mid-cycle product solutions contribution to FCF [free cash flow] that we believe could be 25% of total company value,” wrote Doug Leggate, a BofA oil industry research analyst.
Under mid-cycle conditions, ExxonMobil’s management provided guidance that the company would earn $4 billion more than the run rate achieved in the first half of 2023 and $10 billion above 2019 under mid-cycle conditions for refining and chemicals, Leggate continued.
Three Dividend-paying Oil Stocks to Buy: Transparency Breeds Confidence
“We took two key messages away from the presentations and ‘in-person’ discussion with management,” Leggate wrote. “First, is management’s confidence in delivery of these projects and the way it defines its contribution to earnings and cash flow. Our second takeaway is what is clearly a growth trajectory for chemicals & downstream that goes beyond 2027, with a similar level of spending as has funded its current project queue. What is not clear is whether the market has recognized the incremental value as sustainable given start up that has coincided with the strong rebound in refining margins, blurring the contribution from new projects and efficiencies delivered so far. In our view, risks to current estimates look skewed higher.”
Incremental value of $10 billion is reasonably about $120 billion or almost a quarter of XOM’s market capitalization when fully onstream, Leggate wrote. No other major oil stock has that level of growth, he added.
“With an outlook that doubles cash flow through 2027 from 2019, we see little new that would materially change XOM’s trajectory defined by growth and rate of change in free cash flow that we believe can support relative outperformance vs. peers, Legatte concluded. “We maintain our Buy rating and $145 PO (price objective).”
Chart Courtesy of www.stockcharts.com
Three Dividend-paying Oil Stocks to Buy: Offering Alternative Energy
ExxonMobil’s management understands the need to include alternative energy in its product offerings, said Michelle Connell, head of Dallas-based Portia Capital Management. The oil behemoth recently announced the acquisition of Denbury, a $4.9 billion Dallas company that focuses on carbon capture and oil recovery, she added.
This acquisition will help smooth out the seasonality of XOM’s cash flow/revenue, Connell continued. The company will benefit from large tax incentives by participating in this green energy segment.
In the last few years, ExxonMobil has been focusing on lowering the costs of its headquarters and personnel, Connell commented. The cost-cutting also included the lowering or paying down of the company debt that is expected to continue for the next several years. Another plus is that ExxonMobil has a “strong” annual free cash flow of $5 billion, she added.
Michelle Connell, head of Portia Capital.
ExxonMobil currently has a dividend yield of 3.05% that is expected to increase to 4% during the next 3-4 years, Connell told me. Even though the stock has soared 38.54% in the past year, 10.79% so far this year, 14.21% in the last three months and 9.44% in the past month. Connell estimated XOM could climb 10-15% further in the next 12 months.
The company’s price-to-earnings (P/E) ratio is 9.54%, well below its average P/E of 17. Plus, ExxonMobil’s gross margins are now 28%, compared to 2020 when gross margins were only 4%.
ExxonMobil also is boosting production from its low-cost facilities, such as in Guyana and the Permian basin, while reducing sales from their high-cost production, Connell counseled. Management’s goal is to triple the company’s profits by fiscal year 2027, she added.
Three Dividend-paying Oil Stocks to Buy: Hess
BofA also has a “Buy” recommendation on New York-based Hess Corp. (NYSE: HES). The risks for Hess are similar to those of ExxonMobil, except that the news flow around HES’ exploratory and appraisal drilling activities could hurt the stock. BofA’s outlook for the stock could be fueled by high oil and gas prices.
BoA set a $210 per share price objective on Hess, based on $75 West Texas Intermediate crude. That is below the West Texas Intermediate crude price of $90.79 at 8:05 p.m. on Sept. 29.
Risks to the price objective for Hess are the oil and gas price and margin environment, any significant delays to the new upstream projects critical to its growth targets, taxation and a potential inability to capture the price environment due to cost pressures such as operating expenses and capital expenditures.
Chart Courtesy of www.stockcharts.com
Three Dividend-paying Oil Stocks to Buy: ConocoPhillips
ConocoPhillips (NYSE: COP) is a third major oil stock that is rated as a BofA “Buy.” The investment firm’s price objective of $150 per share is based on $75 West Texas Intermediate (WTI). BofA also assumes long-term Henry Hub natural gas as $4.25.
Potential risks to BofA’s price objective are an uncertain oil and gas price and margin environment, significant delays to new upstream projects critical to its production targets and challenges in capturing the price environment due to cost pressures such as operating expenses, capital expenditures and taxation. Outperformance could occur through increased oil prices and cuts to capital expenditures, BofA wrote.
The company also has a 1.95% dividend yield and announced its next payout will be $.60 per share, payable on Oct. 16. The ex-dividend date of Sept. 27 means any investors who did not own the shares by at least Sept. 26 will not receive the payment. The company has paid a dividend each year since 1986. Institutional investors hold 81% of the company’s outstanding shares.
Chart Courtesy of www.stockcharts.com
Three Dividend-paying Oil Stocks to Buy: Political Risk
Russia’s invasion of Ukraine remains a big factor in keeping oil prices high. To help fund its continuing invasion of Ukraine, Russia has committed to limiting production to keep prices up. OPEC leader Saudi Arabia also has curtailed production to help draw down global inventories.
Political risk could rise further after the Russian Defense Ministry released documents recently indicting its military spending could rise by more than 68% in 2024 to reach $111.15 billion. That amounts to about 6% of Russia’s gross domestic product (GDP), more than the country’s spending on social programs, according to Moscow Times. Russia’s military spending is set to total about three times more than education, environmental protection and health care spending combined.
The three dividend-paying oil stocks to buy could appeal to investors seeking both income and capital appreciation. That is especially true with Russia’s invasion of Ukraine triggering a fierce counteroffensive that lately has launched strikes against positions in the Crimea section of Ukraine that Russia has held since its prior land-seizing invasion in 2014. The political risk seems to keep rising.
Paul Dykewicz, www.pauldykewicz.com, is an award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.