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The 3 Safest Oil Dividends Right Now

By Matthew DiLallo – Jun 8, 2020 at 10:13AM

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These companies should have no need to cut their payouts despite the crude oil glut and the low-price environment.

This has been a brutal year for dividend investors. More than 175 publicly traded companies have trimmed their payouts by at least 50%, with many suspending them entirely. The oil sector was one of the hardest-hit by those dividend cuts, as many payouts plunged along with oil prices

However, not all oil-fueled dividends are in trouble, and those of ConocoPhillips (COP 5.73%)EOG Resources (EOG 5.96%), and Pioneer Natural Resources (PXD 4.04%) are among the safest.

An open safe with a bag full of money on a table.

Image source: Getty Images.

A cash-backed payout

ConocoPhillips entered this year's oil market downturn in a position of strength. It began 2020 with $8.4 billion in cash on its books and had the second-lowest leverage ratio among the top-tier oil producers. Because of that, it has a significant amount of financial flexibility to maintain its dividend, which only costs it about $500 million per quarter.

The company also has one of the lowest-cost portfolios in the oil patch. It has about 15 billion barrels of oil equivalent reserves with supply costs below $40 a barrel, two-thirds of which are profitable under $30 a barrel. Those low-cost resources put it in a strong position now that oil has rebounded to around $40 a barrel. Because of that, the company is generating positive cash flow, which increases its ability to maintain its payout.

With a strong balance sheet and low cost of supply, ConocoPhillips shouldn't have any problem maintaining its dividend, which at current share prices yields about 3.5%, even during this downturn.

Low costs and lots of cash

EOG Resources also entered this year with a cash-rich balance sheet. It started 2020 with $2.1 billion on its books, and recently bolstered that to $2.9 billion by issuing low-cost debt. Even with that incremental borrowing, EOG has one of the lower leverage ratios in the sector.

Meanwhile, it also boasts some of the lowest operating costs in the industry. EOG has an enormous supply of drilling locations that earn premium returns at an oil price of around $30 a barrel. Because of that, the company anticipates that it can generate enough cash at a low-$30s oil price this year to cover its capital expenses and its dividend, which currently yields 2.5%.  

With a healthy balance sheet and ultra-low-cost drilling operations, EOG Resources' dividend remains secure.

An elite balance sheet

Pioneer Natural Resources entered this year with a pristine balance sheet, including the second-lowest leverage ratio in its peer group. Because of that, it was able to take advantage of the turbulent market conditions to raise new convertible debt, which it will use to redeem some of its nearest-term debt maturities. That refinancing will reduce its interest expenses and push out its maturities, further strengthening its top-notch balance sheet.

The company complements its strong balance sheet with low-cost operations and a strong oil price hedging program. Those factors enable it to generate cash to cover its dividend as well as capital spending. Pioneer's dividend, which currently yields 2%, ranks only behind its balance sheet on management's priority list. Given its financial strength, that payout is on one of the firmest foundations in the oil patch.

Durable oil dividends

Many oil companies cut their dividends this year because they needed the cash to shore up their shaky balance sheets. ConocoPhillips, EOG Resources, and Pioneer Natural Resources don't have that concern. Add in their rock-bottom operating costs, and their payouts rank as the most secure in the sector.

Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

ConocoPhillips Stock Quote
$103.00 (5.73%) $5.58
EOG Resources, Inc. Stock Quote
EOG Resources, Inc.
$111.73 (5.96%) $6.28
Pioneer Natural Resources Company Stock Quote
Pioneer Natural Resources Company
$215.14 (4.04%) $8.36

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