As Sunni militants continue their offensive in western Iraq, the price of oil is surging, as the markets read the unstable situation as further evidence that Iraq will be unable to sustain its oil production levels of around 3.3 million barrels per day.
The current flare-up in the Middle East has had the predictable knock-on effect on the shares of the major E&P companies, whose market values have all risen precipitously since Al Qaeda-breakaway group Islamic State of Iraq and Syria (ISIS) began swallowing up chunks of northern Iraq earlier this month. While the country only accounts for around 3.5 percent of global supply, the crisis comes amid earlier and ongoing conflicts in Syria and Libya, which have already disrupted nearly 2 million barrels a day of production. Should Iraq's 3 mb/d be taken out of the equation, a price run beyond the current $105-$108 per barrel WTI range is a virtual guarantee.
With oil and other risk-on commodities such as gold and silver back in favor, investors would be advised to consider wading into oil stocks, particularly since E&P companies are some of the largest in the world and offer investors a relatively healthy, if not risk-free, dividend, even if growth targets fail to satisfy.
As the world's attention stays focused on Iraq, here are five dividend-paying oil companies to keep an eye on in the weeks and months ahead. Factored into my choices below are a company's current and past dividend payouts, its ability to sustain its dividend or increase it, and the company's future profitability.
1. BP (NYSE:BP). At 4.29 percent, BP is a standout among its peers for income growth, compared to Chevron's 3.22 percent yield and ExxonMobil's 2.64 percent. The integrated oil and gas producer hiked its dividend by 2.6 percent in May, following the disposition of four of its North Slope Alaska oilfields. The $1.5 billion asset sale was part of a larger strategy by BP to unload $10 billion worth of non-core assets over the next two years, in an effort to underwrite dividend increases and share repurchases. The company has so far paid out about $42 billion in charges related to the 2010 Deepwater Horizon disaster. However, BP has maintained a strong cash position, with first-quarter cash flows of around $8.2 billion, allowing it to easily cover dividend payments of $1.4 billion, according to hedge fund analyst Winning Strategies.
2. Chevron (NYSE:CVX). With a market cap of $253 billion, Chevron is one of the world's largest oil companies, and has rewarded loyal shareholders with 25 years of consistent dividend increases. In April Chevron raised its dividend by 7 cents to $1.07 per share, giving it a yield of 3.22 percent. Over the last 10 years, Chevron has managed to increase its dividend by 11 percent a year, without stretching its dividend payout ratio (dividend divided by net income), which stands at 39 percent over the last 12 months. Analyst Mike Young notes that if Chevron's payout ratio stays at 35.2 percent and it earns 18 percent return on equity – its average ROE over the past five years – the company's dividend will grow by 12 percent a year.
3. ExxonMobil (NYSE:XOM). Exxon is the second largest publicly traded company in the world, behind only Apple. With a gigantic market cap of $448 billion, ExxonMobil is a cash-generating machine, and should therefore be on every dividend investor's radar. Like Chevron, ExxonMobil is a dividend aristocrat, having increased dividends to shareholders for more than 30 consecutive years. On April 30, ExxonMobil boosted its dividend by 10 percent, to 69 cents a share, and currently bears a 2.64 percent yield. As far as future dividend growth, analyst Stock Gamer determined that lower capital expenditures in 2015 and 2016 will cause free cash flow to increase by 16.8 percent (CAGR) to $16.7 billion in 2016, allowing ExxonMobil to spend $12 billion annually in share repurchases for the next two years. That, compared to a less leveraged position than its peers, would cause earnings per share to increase and thus create room for dividends to grow, at a rate of between 7 and 8 percent annually, according to Stock Gamer.
4. Occidental Petroleum (NYSE:OXY). Occidental has a market cap of $82 billion and grants shareholders a dividend of 72 cents a share, giving the stock a current yield of 2.74 percent. Occidental's dividend has risen by 118.2 percent over the past five years, putting it in the company of Williams Companies, ONEOK, and Peabody Energy for comparable dividend yield and growth. However, looking at the revenue growth of these four stocks, Occidental comes out ahead, at 42.8 percent, notes analyst Stan Stafford, making it his top E&P choice for dividend investors. Moreover, with Occidental's $10.2 billion of capital expenditures set to decline this year on the back of its spin-off of oil and gas assets in California, investors should expect the company to increase share repurchases, allowing it to hike earnings per share and create room for dividend growth.
5. Enerplus (NYSE:ERF). Compared to the last four energy behemoths cited, Calgary-based Enerplus is a minnow swimming in a sea of great white sharks. Its $4.98-billion market cap is a fraction of the E&P majors, yet its 8 cents per share dividend gives Enerplus a decent yield of 4.06 percent. And with a dividend payout ratio of just 18 percent, investors are assured that a relatively small percentage of net income is being put toward dividends. While ERF was forced to halve its dividend in mid-2012 due to weak commodity prices, the future looks bright for the company. Last week, Enerplus announced a 250 percent increase in contingent reserves from its Fort Berthold Bakken and Three Forks formations, to 136 million BOE. That, combined with a 125 percent increase in drilling inventory and a 50 percent improvement in drilling efficiencies, spells growth for Enerplus, according to analyst Michael Fitzsimmons, who estimates the stock is 25 percent undervalued. "Enerplus is a BUY and a good choice for income oriented investors seeking exposure to capital appreciation via Bakken and Three Forks produced oil. I am raising my 12-month price target to $28. Combined with the dividend, that represents a total return opportunity of ~20% over the next year," Fitzsimmons wrote on Seeking Alpha.
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Written by Andrew Topf at Oilprice.com.
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