Oil demand is predicted to increase through 2040, even as its share in the overall global energy supply wanes. The reason is that the world needs an "all of the above" energy strategy if it hopes to satisfy demand increases arising from emerging-market economies. That means there's ample runway for oil drillers like Chevron (CVX 0.69%), Suncor (SU 0.29%), and ConocoPhillips (COP -0.45%), to keep rewarding dividend-focused investors. Here's why each one could be a solid addition to your portfolio.
1. Chevron: Big, safe, and boring
Chevron, with a market capitalization of $245 billion, is probably the least exciting of this trio. But that also makes it a good option for risk-averse investors. For starters, the company's business is highly diversified, with operations spanning from oil drilling to refining and chemicals, providing balance to its cash flows in a historically volatile industry.
Also, Chevron has one of the strongest balance sheets among its integrated-energy peers, with an industry-leading debt-to-equity ratio of just 0.28. And, despite the industry's ups and downs, the San Ramon, CA-based company has increased its dividend annually for over three decades, making it a Dividend Aristocrat. The yield is a generous 4.2% today.
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That's not an exciting story, and it's not meant to be. However, Chevron has been focusing on things that closely matter to its shareholders and operations, like trimming costs, further improving its financial position, and buying back shares. These are business basics that can get lost in the shuffle on Wall Street, but that will help ensure that Chevron can keep paying investors well for sticking around even as the world's energy use evolves. To be fair, the company isn't ignoring the energy transition that's taking place, but oil is the real story here, and Chevron is doing everything right to ensure it remains a profitable and globally dominant player.
2. Suncor: Getting integrated
Canadian oil sands giant Suncor is the next name up. It offers investors a hefty 4.7% yield as it works to be more and more like Chevron. The core of the business is the company's oil sands mines, which take oil-laden earth and squeeze the oil out. These projects are expensive to build, but relatively cheap to operate once they are up and running. Moreover, they have extremely long reserve lives. So Suncor's main business is pretty well-positioned. On top of that, it has built a midstream and downstream operation to help smooth out the volatility associated with commodity prices.
So far so good, but the future is what's most compelling. Right now Suncor believes it has a break-even point of around $35 per barrel of West Texas Intermediate. That includes dividend payments and is pretty low. And yet the goal is to reduce that by as much as $8 per barrel by 2025. Every dollar it saves frees up cash that can be used for other purposes, like the company's early investments in clean energy and, more notably, dividend increases.
There's more risk here given that Suncor is smaller and generally focused on North America, whereas Chevron is an industry giant and has a more global reach. However, as this Canadian oil company starts to look more like its integrated big sisters, including with its cost-cutting success, oil investors with a bit more risk tolerance might want to take a look.
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3. ConocoPhillips: All in and sharing the rewards
The last name in this trio is ConocoPhillips, which is a U.S.-based oil driller that's been expanding its reach into foreign markets. The core story, however, remains energy drilling, so the company's top and bottom lines will ebb and flow along with energy prices. This stock is probably most appropriate for more aggressive investors. But there's an interesting wrinkle here.
ConocoPhillips' goal is to return 30% of cash from operations to investors. The main piece of that is the company's base dividend, which is set at a level that the company believes is sustainable even in the face of low commodity prices. The goal is to grow this core payout over time, but to make sure it is secure. The next stage of capital return is stock buybacks, which improve per-share performance numbers and reduce the cost of supporting the dividend over time.
The third stage of capital return, however, is what's most interesting. When oil prices are high, ConocoPhillips will consider additional dividend payments over and above the core payment, effectively passing on windfall profits to shareholders. If you believe oil has a bright future, this dividend stock is basically a leveraged play on rising oil prices. The yield today is a tiny 1.9% or so, but with the variable component, that's not a good gauge on what investors can expect over time.
Time to dig in
As you might expect, over the past year of improving oil prices, ConocoPhillips' stock has had the best run of this trio. Boring old Chevron pulls up the rear, with increasingly boring Suncor inching just a bit ahead of it. That makes sense given the business models each of these oil names has. And it lays out pretty well how investors should look at the stocks.
ConocoPhillips is a solid option for more aggressive investors who are willing to ride the ups and downs of the oil market. Suncor is increasingly looking to smooth out its performance, built on a core of low-cost oil from Canadian oil sands. And stodgy, globally diversified Chevron just keeps plodding along like it has for decades. One of these names will likely fit your needs if you'd like to invest in oil today.
