Oil Boom Is Fueling Dividends

Photo credit: Apache Corporation

Oil production isn't the only thing booming in America. Dividends paid to energy investors are booming too. Just the other day Apache Corporation (NYSE: APA  ) announced it was boosting its payout by 25%. That's on top of previous pay increases to investors of 18% in 2013 and 13% in 2012.

CEO Steven Farris said in a statement that, "Apache's portfolio has been rebalanced to emphasize predictable and profitable growth, particularly from our oil- and liquids-rich onshore North American assets." Because of this he pointed out that the company's board, "significantly increased the dividend again this year because it has confidence in Apache's ability to execute our future growth plans."

Apache investors aren't the only ones enjoying oil fueled dividend increases. Last year Marathon Oil Corporation (NYSE: MRO  ) authorized a 12% increase in its dividend to investors. Devon Energy Corporation (NYSE: DVN  ) boosted its dividend by 10% over the previous year. Meanwhile, Anadarko Petroleum Corporation (NYSE: APC  ) investors received the greatest boost. The company provided them with a 100% dividend increase last year. Even better, all of these dividends are likely to keep heading higher in the future.

  

Drilling for dividends? Photo credit: Marathon Oil Corporation  

Booming production growth = booming dividend growth
Marathon Oil sees its production in the U.S. growing by 30% next year, with an average annual growth rate of 25% through 2017. That's one of the company's fastest growing regions as overall production growth is only expected to average 5%-7% over that same time frame. Because of this, like Apache it's shedding lower growth international assets in favor of investing in the U.S. By rebalancing its portfolio the company is able to enjoy more predictable and profitable growth, therefore it likely will pay its investors higher dividend payments in the future.

Devon Energy left most of its international markets years ago. Now the company's main focus is to grow its oil production in the U.S. and in Canada's oil sands. Overall, Devon Energy is growing its U.S. oil production at about a 30% rate. That's fueling substantial cash flow for the company as its operating cash flow increased 18% last quarter. The company's cash inflows already exceed its capital demands by more than $200 million, suggesting more dividend increases are on the way.

Then of course there's Anadarko Petroleum. When it doubled its dividend last August the company's CFO Bob Gwin said in a statement that, "This substantial increase in our cash dividend reflects the confidence we have in our portfolio and its capability to deliver capital-efficient growth within cash flow." He also noted that the company continues, "to focus on generating strong returns for, and returning cash to, our shareholders, and this is a very positive step in that direction."

Anadarko's portfolio is being fueled by production growth at its Wattenberg field in Colorado as well as the Eagle Ford Shale in Texas. Last year the company grew its average production in Wattenberg from 22,000 barrels of oil equivalent per day, or BOE/d to 56,000 BOE/d. That growth really helped to fuel the company's ability to grow its dividend. Moreover, the company grew its cash on hand from $1.2 billion in 2012 to $3.7 billion to end the year. It did that through strategic asset sales as well as delivering $240 million in adjusted free cash flow. That cash pile, combined with its continued ability to generate cash means the company could push its dividend higher in the future, once it gets past its current liability problems.

Investor takeaway
Dividend investors should take note that the energy sector is looking like a great place to go for growing dividends. With no end in sight to the energy boom, investors should continue to rack up a lot of income from future dividend growth.

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One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.


Read/Post Comments (6) | Recommend This Article (6)

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  • Report this Comment On February 08, 2014, at 12:28 PM, cmalek wrote:

    Big, fat, hairy deal!

    While the numbers 10%, 20% 30%, even 100% look fantastic, they are very misleading. APA after successive dividend increases of 13%, 18% and 25% is still yielding only 1.8% annually. Anadarko after a whopping 100% dividend increase, is still yielding less than 1% annually. A huge percentage increase on a miniscule dividend only results in a still minute dividend.

    Looking at the title one would expect you to talk about 5%, 6% or even 7% annual yields. What a let down!

  • Report this Comment On February 08, 2014, at 1:00 PM, HoerthCM wrote:

    That's a good point, cmalek. Another question is how long these "little giant" oil companies can maintain these dividend increases. Remember, Marathon, Apache and Anadarko are traditionally explorers and drillers: Once these names get money, they spend it!

    In my opinion, the better dividend names in the oil patch are either the supermajors or the upstream MLPs.

  • Report this Comment On February 08, 2014, at 2:03 PM, tomd728 wrote:

    In my view the yields are inadequate on the 3 mentioned to mitigate downside risk as demonstrated by that group.......increase in div % offset by stock price performance.take this out further and you are losing money on all 3.

    mlps are out there aplenty with much better yield and share price growth.

  • Report this Comment On February 09, 2014, at 12:20 PM, TMFmd19 wrote:

    Absolutely there are better dividend names out there today. Here are two recent in-depth looks at top MLPs:

    http://www.fool.com/investing/general/2014/02/06/an-investor...

    http://www.fool.com/investing/general/2014/02/05/an-investor...

    However, that still doesn't change the fact that the oil boom is fueling huge dividend increases at the companies I mentioned. The boom is likely to yield more increases in the future making today's 1% yield grow substantially over the long-term.

    Matt

  • Report this Comment On February 10, 2014, at 11:36 AM, SkepikI wrote:

    ^ So Matt lets test the big picture view of say APA- a good? performer with its P/E at 18+ and a 1.2% yeild, underperforming? vs S&P in a declining demand market, with increasing production and commodity prices stable flat or maybe down, working in an overall economy that is either lackluster 3% increase to flat...

    NOT A RECIPE FOR SUCCESS I RECKON. Unless they are the best in their class, out to eat the Lunch of all the other players... and I do not think you can say that about APA.

  • Report this Comment On February 10, 2014, at 11:38 AM, SkepikI wrote:

    ^ AND I suspect you could say that about all of these players.

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