There are many, many safer sectors to invest in right now than the oil industry. Yes, the entire stock market is in turmoil due to coronavirus concerns, but companies in this sector are dealing with an oil price collapse on top of the sudden drop in demand for fuel caused by travel restrictions. Oil companies have been slashing dividends right and left, and at least one (Whiting Petroleum) has filed for bankruptcy.
With oil prices so low, independent exploration and production companies (E&Ps) are going to have a tough time, so investing in them right now is not recommended. Oilfield services companies and rig operators are also going to feel the pinch of decreased demand, as numerous producers have announced cuts to their capital budgets. So they're not good candidates either.
If you're really committed to investing in the oil industry right now, your best bet is to go for the strongest dividend-paying companies out there, which have a better chance of weathering the storm intact and rewarding you for your patience into the bargain. That's why this month, I'm recommending Royal Dutch Shell (RDS.A) (RDS.B), ExxonMobil (XOM -2.78%), and Phillips 66 (PSX -3.71%). Here's why these are the top picks in the sector for April.
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Best in class dividend
Like the rest of the oil industry, integrated oil major Royal Dutch Shell saw its stock fall in early March when the oil price war between Saudi Arabia and Russia resulted in both countries vowing to flood the global energy market with cheap crude. Oil prices had been barely hovering above $50/barrel, but the news essentially cut those prices in half, dragging down Shell's shares along with everyone else's in the industry.
There's no way Shell is going to outperform with oil prices this low. And unlike the last oil price downturn in 2014, refined products like petrochemicals and gasoline are also low thanks to oversupply. So Shell won't be able to lean as heavily on its downstream (refining and marketing) business as it did in the past.
However, one thing Shell does still have going for it is its best-in-class dividend, which has been a top yielder among the oil majors for the last five years, and is currently yielding more than 10%. And Shell is committed to maintaining that dividend, recently announcing it will cut its 2020 capital spending by at least 20% and suspend its share buyback program to help preserve cash to maintain its payout.
Also working in Shell's favor are its rock-solid balance sheet, high credit rating, and shareholder-friendly management team. Shell looks like a safe bet to continue paying its full dividend until oil prices recover.
Another safe dividend
For the strongest companies in the oil industry, it's all about keeping the proverbial lights on while they wait for a recovery. ExxonMobil, a company renowned for the strength of its balance sheet, is uniquely positioned to do just that.
Exxon's current dividend yield of 8.4% may not be as high as its Big Oil peer Shell's, but it's near March's record high for the company. Better yet, ExxonMobil is a dividend aristocrat, having upped its payout every year for the last 37 years. That's a streak that the company's management definitely wants to continue.
The company just offered major reassurance to the market that its dividend was secure: it rolled out a 30% cut in 2020 capital spending and an additional 15% in operational spending. Like Shell, it plans to use the money it saves to continue paying its dividend. Also like Shell, it has an excellent credit rating in case it needs to tap the capital markets to help it weather the current storm.
A refiner poised for the long haul
If integrated oil majors aren't your cup of (Texas) tea, you might consider an investment in a strong oil refiner like Phillips 66. The company doesn't produce oil, so it's somewhat insulated from crude oil price swings, but it does have a diversified portfolio, including its Phillips 66, Conoco, and 76 branded filling stations, a refinery network, and even exposure to pipelines through its master limited partnership (MLP) Phillips 66 Partners.
Under ordinary circumstances, low crude prices would be good for Phillips 66, because it could earn higher margins from its refining operations and increase traffic to its filling stations due to lower gas prices. These, unfortunately, are not ordinary circumstances.
Thanks to global travel and production shutdowns caused by coronavirus concerns, demand for refined products like fuel and petrochemicals has collapsed. That's made an existing oversupply problem even worse, and now refiners like Phillips 66 are stuck waiting for demand to increase again. Luckily, Phillips 66 has $1.6 billion in cash on its books and a consistent track record of cash generation to help it fund its dividend, which is currently yielding 6.1%.
Looking to the long term
Unfortunately, some oil companies may not make it through the current oil price slump. Still others will make it to the other side, but only by severely slashing their dividends. The best companies, though, will be able to maintain or increase their dividends and still emerge relatively unscathed thanks to the strength of their operations and their balance sheets.
Oil may not be the right place to invest your money right now, but if you do decide to buy in, Royal Dutch Shell, ExxonMobil, and Phillips 66 look like some of the best picks you can make.
