IMAGE SOURCE: TOTAL SA.
The oil-price crash over the past two years and subsequent struggles of oil and gas companies to remain profitable has left many investors wary of investing in the industry. Believe it or not, though, some companies have emerged in relatively good shape and continue to reward investors with solid dividend yields.
Second-quarter earnings results from Valero Energy (VLO +2.19%), Total SA (TOT +0.00%), and NuStar Energy L.P. (NS +0.00%), should give you relative confidence that their high yields are here to stay.
Valero Energy
Valero Energy, an oil and gas refining and marketing company, reported $503 million in second-quarter earnings despite refining margins that dropped 35% per barrel year over year. Its refining operating income of $954 million just barely covered its refining operating expenses of over $900 million and is $1.2 billion lower than a year ago. Regardless, it maintained its 4.6% dividend and returned $683 million to its shareholders in the second quarter, which includes $282 million in dividend payouts and $401 million in share buybacks.
Valero felt comfortable in these shareholder returns because it generated $2.3 billion in cash during the quarter. Company leadership attributes these strong cash flows to safe and low-cost operations in "advantaged" locations in the Gulf of Mexico. Additionally, its cash on hand and temporary cash investments increased to $4.9 billion during the quarter, giving it considerable flexibility for the future.
Lower oil prices might improve refining crack spreads and improve refining margins in the second half. Either way, though, the company is committed to returning 75% of net income to investors this year. You should feel comfortable that Valero will maintain its dividend for the long term.
Total SA
Total SA, a large integrated oil company, delivered strong second-quarter earnings of $2.1 billion and operating cash flows of $2.8 billion. From the perspective of its 5.7% dividend, the second quarter was particularly promising. Despite paying out nearly $1.25 billion to its shareholders, Total still increased its cash and cash equivalents by $2.6 billion.
The results were driven by more than doubling its first quarter upstream operating income and continuing to drive down costs. In fact, the company expects to surpass its cost reduction goal for the year of $2.4 billion.
On top of that, Total is well positioned to increase its future earnings, both because of cost reductions and savvy investments. For example, in the second quarter, Total obtained a 30% interest in the giant al-Shaheen field off the coast of Qatar, which is underpinned by a 25-year contract. Total has also sought out ventures in Africa and green energy as it develops its strategy for long-term profits. Its dividend seems very secure.
NuStar Energy
NuStar Energy, an oil and gas midstream and storage provider, boasts an impressive dividend of 9.3%. While it's not uncommon for limited partnerships to boast such high yields, NuStar had a solid second quarter despite a difficult operating environment that makes it a good long-term pick for dividend hunters.
One source of confidence is simply the fact that its distributable cash flow of nearly $93 million more than covered its $85 million distribution, and NuStar expects this trend to continue for the remainder of 2016. One reason that its cash flows remained positive in the second quarter is that it boasts a large array of pipelines and storage facilities that can generate income. For example, while its crude throughputs dropped in the second quarter, its throughput of refined products increased, which helped offset potential losses.
Long term, NuStar has several projects coming online in 2017, such as the expansion of existing terminals and new pipeline development. These should add to its distributable cash flows next year and allow it to continue to cover its distribution.
