West Texas Intermediate crude oil, the U.S. benchmark, currently sits above $90 per barrel. Henry Hub natural gas prices are over $4.30 per one million British thermal units (MMBtu). These are the highest oil and gas prices since 2014.
Many oil and gas companies were pressured to cut spending and production during the COVID-19 pandemic. The result is what looks to be a multiyear period of low supply. Paired with increased demand as the economy rebounds, oil and gas prices have soared -- and many oil and gas stocks are now around 52-week highs.
However, there are still bargains if you know where to look. Baker Hughes (BKR +0.57%), Caterpillar (CAT +0.11%), and Phillips 66 (PSX +1.82%) are three dividend-paying oil and gas companies that are benefiting from $90 oil. Here's what makes each a great buy now.
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Baker Hughes is a play on higher oil prices
Lee Samaha (Baker Hughes): It's been a long time coming, but Baker Hughes is looking like a good investment for oil bulls. The company was created in 2017 due to a combination of Baker Hughes and the oil & gas business of General Electric. The latter was built up with a series of ill-fated acquisitions earlier in the decade when the price of oil was closer to $100 a barrel.
Therein lies the problem for oilfield services and equipment companies like Baker Hughes. What do they do when the price of oil is falling, and exploration and production companies are cutting back investment? That's a question the industry has had to ask itself over the years.
However, yesterday's problem is today's opportunity. In other words, when oil prices are rising, you can bet Baker Hughes will see orders and revenue growth. Indeed, after years of sluggish investment and relatively weak oil prices, the environment is ripe for a period of investment. Oil services companies have been a rare bright spot in the market in 2022.
Baker Hughes is particularly interesting because of its blend of services, equipment, and machinery ably supported by digital solutions. The breadth of offerings makes it a highly correlated play on oil, with some growth kicker from its digital solutions (software and data analytics to help customers improve operations). With this in mind, it's no surprise to see orders up 24% sequentially in the fourth quarter of 2021, up 28% on a year-over-year basis.
Throw in a 2.7% dividend yield, and there's a lot to like about Baker Hughes in the near term. Longer term, there are still question marks around future investment in fossil fuel assets, but for now, investors in Baker Hughes look likely to enjoy a very strong 2022 as an investment in energy assets starts to flow.
A Dividend Aristocrat with a ton of upside
Daniel Foelber (Caterpillar): Lee's Baker Hughes pick offers a direct way to invest in oil and gas growth. Share prices of oilfield services companies like Baker Hughes, and exploration and production leaders like ConocoPhillips deserve to be near 52-week highs. But there are other, less volatile ways to approach an oil and gas investment. Take a diversified industrial behemoth like Caterpillar.
Caterpillar benefits from a growing oil and gas market without depending on it in a boom and bust fashion. It supplies equipment used in gas compression, land-based and offshore drilling, and the well service industry. Caterpillar's customers are more inclined to purchase a new engine or buy a performance emission upgrade kit when they have the extra cash to do so.
Folks familiar with Caterpillar often think of construction equipment. But in 2021, Caterpillar's energy and transportation division brought in $20.6 billion in sales and $2.4 billion in operating profit, which was 39% of total sales and 41% of its total operating profit. This performance makes the energy and transportation division about as big as its construction business.
Caterpillar offers exposure to several different elements of the global energy, industrial, and materials sectors. It's a cyclical but diversified business that has a track record of delivering reliable free cash flow in good times and bad. Caterpillar's consistency and liquidity have allowed it to pay and raise its dividend for 27 consecutive years, making it a Dividend Aristocrat. With a 2.2% dividend yield, Caterpillar has the potential to be a core blue chip holding in a variety of portfolios.
Oil your passive income wheels with this diversified energy stock
Scott Levine (Phillips 66): With oil prices rising steadily over the past year, it's no surprise that oil and gas stocks are popping up on energy and dividend investors' radars alike. And one name, in particular, that warrants serious attention is Phillips 66. Tracing its history back 140 years, Phillips 66 is no stranger to the whims of the energy market, suggesting that this is an industry stalwart that has the fortitude to buttress investors' portfolios.
Reporting a net loss in 2020 for the first time since its initial public offering (IPO) in 2013, Phillips 66 appears to be -- very notably -- back on track. In its fourth-quarter 2021 earnings presentation two weeks ago, Phillips 66 reported that it generated a company record for its marketing and specialties, midstream, and chemicals businesses. As oil prices recover, hovering around the $90 mark, investors should look for the company to report stronger cash flow -- something which will likely benefit shareholders.
On the Q4 2021 conference call, Greg Garland, the company's chairman and CEO, noted that "Last year, our strong cash flow generation allowed us to invest $1.9 billion back into the business, returned $1.6 billion to shareholders, and paid down $1.5 billion of debt."
In addition, he said that "As cash flow improves further, we'll prioritize shareholder returns and debt repayment. In October, we increased the quarterly dividend to $0.92 per share." As a result of the recent dividend raise, investors can scoop up shares of Phillips 66 and collect a juicy 4.14% forward dividend yield.
Lest prospective investors think that the company's stock is too pricey now with the recent increase to the dividend, shares can be found on the discount rack. Currently, shares are trading at 6.5 times operating cash flow, representing a deep discount to the stock's five-year average multiple of 11.2.
