After a nice run, which was punctuated during the confrontations with Iran early this month, the benchmark price of oil, which reached almost $65 a barrel for West Texas Intermediate, has been absolutely hammered, down over 17% since January 6. While the future of the internal combustion engine is probably dim, the electric vehicle revolution will not change the status quo anytime soon.
Given the dramatic drop in energy price, and the beating that some of the top stocks in the industry have taken, combined with the low interest rate environment, with yields on Treasury debt tumbling in January, we decided to screen the Merrill Lynch energy research universe looking for big dividend payers rated Buy.
We came across four top companies that pay rich dependable dividends and should continue to battle through the weakness in the sector until we get to the summer driving and travel season. All are suitable for growth and income accounts looking for total return potential.
Energy Transfer
This top energy master limited partnership is a very safe way for investors looking for energy exposure and income. Energy Transfer L.P. (NYSE: ET) owns and operates one of the largest and most diversified portfolios of energy assets in the United States, with a strategic footprint in all the major domestic production basins.
Energy Transfer is a publicly traded limited partnership with core operations that include complimentary natural gas midstream, intrastate and interstate transportation and storage assets; crude oil, natural gas liquids (NGLs) and refined product transportation and terminaling assets; NGL fractionation; and various acquisition and marketing assets.
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Through its ownership of Energy Transfer Operating, formerly known as Energy Transfer Partners, the company also owns Lake Charles LNG Company, as well as the general partner interests, the incentive distribution rights and 28.5 million common units of Sunoco, and the general partner interests and 39.7 million common units of USA Compression Partners.
Investors receive an outstanding 9.67% distribution. Merrill Lynch has a $20 price objective on the shares, while the Wall Street consensus figure is $19.81. The stock closed trading on Tuesday at $12.70 per share.
Exxon Mobil
This remains a top Wall Street energy pick, and it is a safer long-term play for conservative investors. Exxon Mobil Corp. (NYSE: XOM | XOM Price Prediction) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.
Exxon also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas and petroleum products. Note that Exxon has one of the highest paid American CEOs.
The company reported better third-quarter results that did have some positive trends, and Merrill Lynch noted this at the time:
ExxonMobil’s third quarter is underlined by momentum towards a target to double cash-flow by 2025 with visible growth in exploration and production leading the way. Project execution remains strong while peer leading balance sheet allows for countercyclical investment at advantaged costs. With asset sales set to close any deficit in cash-flow, the company’s strategy clears the way for future rateable dividend growth.
Fourth-quarter results are expected on Friday, January 31.
The company raised the dividend last year by a nickel per share to $0.87, which now translates to a solid 5.08% dividend. The Merrill Lynch price objective is $100, but the posted consensus target price is much lower at $77.76. Exxon Mobil stock closed at $64.65 a share on Tuesday.
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Occidental Petroleum
This energy company made huge news last year with a Warren Buffett backed purchase of Anadarko Petroleum. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals.
The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. Meanwhile, the chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.
The shares have underperformed since the Anadarko acquisition was announced, but the investment case anchored by yield has not changed. With its rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now.
Occidental Petroleum offers shareholders a massive 7.66% dividend. The huge $80 Merrill Lynch price target compares with the much lower $54.85 consensus target, as well as the most recent close at $41.20 a share.
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Schlumberger
This top oil services company is expected to benefit from increased global exploration and production spending, and it is also on the Stifel Select List. Schlumberger Ltd. (NYSE: SLB) is the world’s largest provider of services and equipment used in drilling, evaluation, completion, production and maintenance of oil and natural gas wells.
The company operates in the oilfield service markets through three groups: Reservoir Characterization, Drilling and Production. Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. These include WesternGeco, Wireline, Testing Services and Schlumberger Information Solutions.
Rising activity, backlog additions for integrated projects and the possibility that international pricing has bottomed, and should improve the rest of 2020, are all positive data points for the stock. The company is leveraged to improving international activity and has a strong free-cash-flow, and potential asset sales should bolster the balance sheet. Limiting SPM investment and disciplined capital spending plans also should keep the sizable dividend safe.
Schlumberger shareholders receive a generous 5.59% dividend. Merrill Lynch has set its target price at $45. The posted consensus price target was last seen at $43.38, and the shares ended trading on Tuesday at $33.96 apiece.
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While the energy sector remains out of favor, the key to buying these top stocks is twofold: They are all trading closer to 52-week lows than most stocks, and the big and dependable dividends help investors wait out the lull in the sector.
Given the slowdown in U.S. production, the continued cuts from OPEC (which may even get deeper) and the always worrisome geopolitical issues in the Middle East, a $55 to $60 plus average handle on crude throughout 2020 looks quite possible. That bodes well for some of these beleaguered industry-leading energy stocks.
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