It's been a disappointing 12+ months for many energy dividend stalwarts. Kinder Morgan (NYSE: KMI) cut its dividend by 75% in December. ConocoPhillips (NYSE: COP) slashed its payout by 66% two months later. With crude and natural gas prices so low, the companies don't have much of a choice. They can either choose to keep their growth plans, or they can cut dividends. Many energy companies have decided on the former, and fear that other companies could make the same decision have sent energy stocks even lower.
While most companies in the energy industry aren't doing well, Valero Energy (NYSE: VLO), Occidental Petroleum (NYSE: OXY), and Enterprise Products Partners (NYSE: EPD) stand out from the crowd. They haven't cut their dividends like other energy companies, and their strong balance sheets and robust cash flows insulate the companies from trouble. Best of all, each of the three stocks pay attractive yields. .
A strong refiner
Refiners received some bad news when Congress reversed the crude export ban in December. Because of Congress' act, WTI's substantial discount to Brent has shrunk, and U.S. refiners, who benefit from the Brent-WTI spread, are making less money because of it. Nevertheless, the U.S. refiners are doing well. Given that natural gas prices are lower in the U.S. than in the rest of the world, U.S. refiners like Valero Energy have lower costs and higher margins than its competitors. Given that refining capacity hasn't expanded much, the industry's operable utilization rate is high, which further increases margins. Because of these trends, refiner earnings are healthy. Valero earned $9.24 per share in 2015, more than enough to cover its annual dividend cost of $2.40 per share.
Because of its strong earnings and its excellent debt to capital ratio of 0.26, Valero raised its dividend twice last year, once from $0.40 cents per share to $0.50 per share, and another from $0.50 to $0.60 per share. Given its payout ratio of 21.4% and average annual expected earnings growth rate of 8.26% for the next five years, Valero's dividend can grow at a double digit percentage rate for the next five years and the company would still have plenty of cash to left over to repurchase shares or pursue growth initiatives.
A leading independent
Image Source: Occidental Investor Relations
Occidental Petroleum management is confident the company won't cut its dividend.. Occidental President Vicki Hollub said recently, "we don't see a threat to our dividend going through this cycle." Management has said that they "expect to be able to continue to grow our dividend for many years into the future." Because it has $4.4 billion of cash on its balance sheet, and expects to receive $900 million from an Ecuador settlement, and an additional $300 million from asset sales, Occidental has more than enough money to cover its dividend cost of $2.23 billion per year. Because Occidental plans to cut capital expenditures by 50% to $3 billion in 2016 as some of its growth projects come online, the company's cash flow picture will remain strong even if crude prices stay lower for longer.
Occidental 2016 estimated cash flow Source: Occidental Investor Relations
As the above chart illustrates, Occidental expects to make $4.8 billion in cash flow in 2016 assuming a WTI price of $42 per barrel, or just about enough to cover the dividend and the capital expenditure program without having to dip into its $4.4 billion in cash.
Given that every $1 per barrel change in WTI affects the company's annual operating cash flow by $100 million, WTI could average $30 per barrel until 2017 and Occidental would still have $2 billion on its balance sheet.
With one of the industry's least leveraged balance sheets, 13 straight years of dividend raises, and a dividend yield of 4.4%, Occidental will be one of the survivors in the industry that will continue to pay its shareholders even when times become tough. If crude prices rebound, Occidental shares will have substantial upside.
A resilient midstream giant
Many MLPs lost their credibility because they promised safe dividends and delivered payout cuts instead. Enterprise Products Partners (EPD) isn't one of them, as the company recently raised its quarterly dividend to 39 cents, up from 38.5 cents a quarter earlier. Enterprise also plans to increase its dividend by $0.05 per share every quarter this year, giving it an annual payout of $1.61 per share, or 5.2% higher than 2015's payout of $1.53 per share. The company's annual payout gives Enterprise a yield of 6.67% at current prices.
Enterprise's dividend hikes are due to its strong financial results. For its fourth quarter, Enterprise reported distributable cash flow of $1.09 billion, up from $1.06 billion a year ago, and enough cash to cover its dividend 1.3 times over. Management has kept a close eye on costs. Although Enterprise's fourth quarter revenue dropped 40% year-over-year to $6.16 billion, its total costs fell even further by 43%. Management has made sure that Enterprises debt is manageable, with the company sporting a modest debt to equity ratio of 1.11.
Enterprise's dividend is safe, and for this reason Enterprise Product Partners has access to capital, and can still grow during challenging times. When crude prices recover, Enterprise will be in prime position to make an accretive acquisition.
While many are suffering in the energy industry, Valero, Occidental, and Enterprise Products Partners are delivering robust results. All three have strong balance sheets, and two of the three raised their dividends recently. Each company has the financial strength and flexibility to survive a prolonged energy downturn and will continue to pay their shareholders handsomely along the way.