No matter your investing experience or the size of your portfolio, we've all been injected with a dizzying dose of volatility over the past year.
In the first three weeks of March 2020, the S&P 500 plunged roughly 25% as the COVID-19 pandemic shocked Wall Street and Main Street alike. In the first week of March 2021, the Nasdaq lost up to 10% of its value before recouping most of those losses over the following weeks.
Dividend stocks provide income no matter how stock prices are moving, effectively counteracting volatility when you need it most. Oil stocks have their risks, but often pay high dividends too. And with oil prices at their highest point in over a year, many companies are on track to grow earnings. Texas Pacific Land Corporation (TPL -1.09%) and Chevron (CVX -0.08%) are the cream of the crop. Here's why.
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Making hay in good times and bad
The oil industry is notorious for its reliance on debt. So it may surprise investors that one of the largest landowners in Texas, Texas Pacific Land Corporation (TPL), has no debt and $280 million in cash. TPL is one of the oldest companies on the New York Stock Exchange and used to be a railroad company back in the day. As compensation for building track, it acquired millions of acres of land. It has sold most of it over the years, but the 880,000 acres it has left are smack dab in the middle of Texas oil country. TPL's chunk of Texas land is bigger than the entire state of Rhode Island, and there's a lot of ways to profit from this position.
TPL's bread and butter are fixed fee payments and royalties from oil and gas producers. It also sells water to producers. Water is a key component of the hydraulic fracturing process. If you've ever been to West Texas, you'll know that a company with a reliable water source is a valuable thing. TPL also makes money from utilities and pipelines that want to build on its land. And finally, it sells caliche used in the construction industry.
When times are good, TPL makes more money. Regardless of the amount, it distributes nearly all of its operating cash flow to investors through special dividends. Even though West Texas Intermediate (WTI) oil prices averaged less than $40 per barrel in 2020, TPL generated over $200 million in operating cash flow and distributed over 97% of it to shareholders in two dividend payments totaling $26 per share. When oil prices are low, TPL makes less money, but it still makes money. In the oil industry, bad times (like last year) can mean multi-billion dollar losses, crippling debt issuances, or even bankruptcy. TPL's access to upside and limited downside risk makes it one of the safest if not the safest oil dividend stocks on the market today.
The best oil major
Chevron lacks many of TPL's advantages. It has a lot of debt. It lost $5.5 billion in 2020. And unlike TPL, which sits back and lets the cash roll in, Chevron needs to spend a lot of money to make money.
Chevron endured decades in rival ExxonMobil's (XOM -0.02%) shadow. Just a few years ago, Chevron was spending more money than Exxon to finish major projects -- namely two Australian LNG megaprojects (Wheatstone and Gorgon).
CVX Net Total Long Term Debt (Quarterly) data by YCharts
Chevron was largely relying on debt to fund its dividend and spending, which ballooned its total net long-term debt position. With many long-term projects completed, Chevron can now spend relatively little money to sustain production. The result is less strain on its balance sheet, which has improved to be the best of the oil majors. Chevron's received recognition for its financial strength when Exxon was removed from the Dow Jones Industrial Average -- not Chevron.
Last year, Chevron briefly passed Exxon in market cap for the first time in history.
CVX Debt To Capital (Quarterly) data by YCharts
After its total long-term debt nearly doubled in 2020, Chevron retains its industry-leading position. Even at current levels, Chevron's debt-to-capital and debt-to-equity ratios remain healthy.
Aside from its balance sheet, Chevron has one of the more efficient oil and gas portfolios. It has spent years improving efficiency so it can break even even at lower oil prices. Chevron's capital spending fell 35% in 2020 as its capital and exploratory expenditures were just $13.5 billion compared to $21 billion in 2019.
Less spending means less oil development, which affects future production. However, it also means Chevron can run a tighter ship during lean times and still produce a ton of oil at low cost. In fact, Chevron estimates it "only" needs around $11 billion to sustain current production. At current oil prices, Chevron is ready to more than make up for its 2019 losses. Even if prices fall 30% to 40%, Chevron's breakeven figures suggest it can turn a profit.
A safer way to play a booming sector
The rapid rise of energy stocks over the past few months shows how quickly a sector can go from out of favor to in favor. High-yielding penny stocks and speculative plays are alluring, but ultimately, they are rarely worth the risk. Instead, it's better to focus on companies that will benefit from higher oil prices without losing their shirt when times are tough. Texas Pacific Land and Chevron are two of the safest oil stocks on the market today. The former is poised to have one of its best years ever and reward shareholders through plenty of special dividends. Chevron is a Dividend Aristocrat, having raised its annual payout for over 30 consecutive years.
