The oil patch has been a tough place for dividend investors in recent years. Oil price crashes in 2014 and earlier this year took many payouts down with them. Because of that, many income investors have given up on the sector.
However, several oil stocks pay dividends that should withstand the ups and downs of the oil market in the future. Three that look durable are EOG Resources (NYSE:EOG), Total (NYSE:TOT), and Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B).
Reliable and willing to change
Reuben Gregg Brewer (Total): One of the biggest knocks against oil stocks is that renewable power is displacing carbon fuel in the global energy mix. If that has you worried about dividend-paying oil stocks, then France's Total is the name for you. Not only is it one of the largest and most diversified oil majors on Earth, but it also happens to be using that foundation to build a business around electricity. That's included things like investing in renewable power and buying electric utilities. It is changing with the world around it.
And, all the while, it has remained dedicated to returning value to investors via a generous dividend. The yield today is 7.6%, but the real beauty is that the payment has stayed the same or risen for 35 years. And, during Total's second-quarter 2020 earnings conference call, CEO Patrick Pouyanne explained, "the Board reaffirms the sustainability of this level of the dividend in a $40 per barrel Brent environment." That's around where oil is today and, historically speaking, a pretty low price point, which suggests Total's dividend has a lot of staying power. Although the future can always change, Total has proven that, when it comes to the dividend, it likes things just the way they are.
A durable oil-fueled dividend
Matt DiLallo (EOG Resources): Shale giant EOG Resources pays one of the most resilient dividends in the oil patch. It was one of the few oil producers that maintained its payout during the two most recent oil price crashes. Driving this durability during those storms is the company's top-notch balance sheet, strong oil hedging program, and low-cost operations.
All three were on full display during the turbulent second quarter. Overall, EOG generated $672 million in cash (backstopped in large part by its oil hedges), which was nearly enough to cover both capital expenses ($478 million) and the dividend ($217 million). It could easily cover the small shortfall thanks to its cash-rich balance sheet, which stood at $2.4 billion at the end of the period. It was even able to take advantage of lower interest rates to refinance some existing debt during the quarter, which is a testament to the strength of its investment-grade credit rating.
Meanwhile, with oil prices improving from their bottom in recent months, EOG's dividend will be on an even more sustainable footing. The company estimates that it can generate enough cash at oil prices in the mid-$30s to cover its capital expenses and dividend for the rest of the year. With crude currently in the low $40s, EOG is on track to generate excess cash. Because of that, its 3.1%-yielding dividend looks like one of the few in the oil patch that investors can count on these days.
Reset and ready to go
Daniel Foelber (Royal Dutch Shell): At first glance, Royal Dutch Shell may seem like a strange addition to this list given the company cut its dividend by two-thirds earlier this year. However, Shell is now in a much better financial position to afford its dividend, which yields a respectable 3.9% at the time of this writing.
In the past, Shell had the best FCF out of all the oil majors. In the second quarter last year, it posted a whopping $6.2 billion of organic FCF which was plenty to cover its dividend payment of $3.8 billion. But the impacts of COVID-19 on the oil and gas industry are weighing on Shell's earnings, and it posted negative organic free cash flow this past quarter.
However, Shell's quarterly dividend payment should now be just $1.2 billion per quarter, and it only plans on spending $20 billion or less this year compared to its original guidance of $25 billion. Shell also suspended its share buyback program, which was originally intended to average about $2.5 billion per quarter.
With the pressure somewhat off, the new Shell is now in a better position to recover from the downturn and rebuild its business. Shell CEO Ben Van Beurden noted that Shell plans to resume dividend raises and spend more money once business conditions improve. Shell CFO Jessica Uhl said that Shell wants "to be No. 1 from a total shareholder return perspective, and that's only going to happen if we increase dividends or do buybacks and/or through share price appreciation."
Compared to other oil majors that delayed major dividend cuts, Shell was wise to rip off the bandage early, giving it the head start and clean slate necessary to reset and move forward instead of prolonging the pain. And with shares down nearly 50% for the year, investors will be able to enter this long-term turnaround at a discount.