Recently, Keith Kohl, the managing editor here at Energy and Capital, asked if I’d be willing to impart a little of my knowledge here in his daily newsletter. He’s been keen to have me share with you some of the best investments in the energy industry, so you can understand why I immediately jumped at the opportunity.
For those of you unfamiliar with my work and research, I’d like to take a little time to introduce myself.
My name is Jason Williams. I’m a former investment banker. A former senior analyst for a Forbes 100 private company. A former budget and strategy analyst for the U.S. Army. And a current editor at our partner site, Wealth Daily. I’m also the associate editor of The Wealth Advisory. It’s an investing service here at Angel Publishing that offers readers the chance to build lasting wealth, and do it through some of the safest and best-performing investments in the stock market today.
The energy industry has always been a favorite of mine. It’s exciting. It can be ridiculously profitable. It allows me to travel to some really interesting places and meet some really interesting people. And it’s right in line with my passion for creating income by investing in great companies that pay shareholders just for being along for the ride.
And that’s what I’m going to talk about today.
Shut Up and Pay Me
I’m sure you already realize I’m talking about dividends. They’re a great way to add some profit to your stock gains. They cushion your portfolio from downturns in the market, and they provide a steady stream of reliable income when you really need it.
There are tons of places to put your money and get a solid return when oil prices are sky-high. But when times are a little tougher in the industry, you have to be a lot pickier. We all saw this over the past couple of years as oil prices bottomed out. Some companies dropped more than 50% in value. Some outright went bankrupt. And lots of investors lost a pretty penny.
But those of us who were looking for the strongest companies, those of us who were basing our investments more on income than capital appreciation, we were able to cushion those losses with dividends.
So, how do you pick a company that’s going to keep afloat no matter what the market does? And how do you make sure you’re going to get paid for your investment even when cash isn’t flowing in quite as fast?
There are some basic rules when it comes to picking a dividend-paying company. But when you add oil to the equation, you need to add some more specific criteria.
How to Spot a Solid Dividend
There are a few main things I look at when picking a new dividend play. No matter what the industry, I make sure the stock meets these requirements before putting my money (or my readers’ money) to work.
Operating Cash Flow is generally a better metric for a dividend stock than earnings per share (EPS). A company can use all sorts of accounting gimmicks and tax credits to manage its net earnings, but it still may not be able to properly service its debt.
Cash flow is what pays the bills. It is the cash that comes into the company after it collects revenues from sales and pays off its suppliers.
Levered Free Cash Flow is the amount of cash available after interest payments on debt are made.
A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means there is more money to send to shareholders in the form of dividends and vice versa.
Cash on Hand is an excellent indicator of a dividend’s sustainability. Having plenty of cash means the company can sustain short-term swings in the business/economic cycle. A high level of cash is also a good indication that you’ll be treated to regular dividend hikes.
That’s because, in a general sense, a company only needs so much cash. Once there’s sufficient cash in the bank, more earnings can be returned to shareholders.
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How to Pick an Oil Dividend
When it comes to picking an oil company to pay you for your investment, you’ve got to add a couple of specs to the mix. That way you’re sure you’ve got a payment that’s not getting dropped at the first sign of trouble, and you’re not buying into a company knocking on death’s door.
Revolving Credit is the amount of money a company can count on from the bank when it wants to expand, or even when it needs a little extra juice to pay that dividend and keep operations going full steam ahead.
Buying or leasing new property… setting up rigs… getting and keeping those rigs running… it’s all a pretty expensive undertaking. And companies aren’t going to be able to do it alone. That’s why you need to look for the ones with access to a strong line of credit. At least $1 billion is a minimum. More is better.
Prime Acreage is also very important. A company can’t make money if it’s drilling in expensive fields. It can’t make money if it’s drilling in fields that don’t produce a lot of oil. And it can’t pay you a dividend if it’s not making money.
So you want to look for companies that have lots of acreage in prime locations. The Permian Basin is probably the best and most prolific field in the U.S. right now. So, companies with lots of acreage there are going to be able to make some serious profits to share with investors.
Hedging is a tool oil companies use to secure some of their profits no matter where the price of oil heads. What they do is sell futures contracts on the oil they’ll produce. And they’re able to lock in a price in the present for oil they’ll deliver in the future. This is great when you think prices are heading south. You can make sure your cash flows aren’t hit as hard if crude takes a dive. But if you’re expecting prices to rise, then you can be cutting into your potential profits. So, companies have to be careful about hedging too much of their future sales. They want to cover the chance of losses. But they also want to make sure there’s still some left to sell for more if prices climb.
If a company has all of its future production hedged for the next few years, I tend to stay away. I’d hate to see prices go up and my investment not be able to take advantage of it.
Let’s Get Paid
Now that you’ve got some of the main requirements for a steady oil dividend, let’s talk about some companies that are already paying solid ones and are primed to hike them as oil prices continue to rise.
There are a bunch of great income investments out there right now, especially after all the cuts and cancellations we saw in 2015 and 2016. Companies are coming back online. And lots of them are ready to start paying again or increase that investor paycheck.
I’m personally watching 10 or so companies I’m convinced are ready to grow exponentially in the near future. And I’m going to let you in on three of the best of them today to get you started.
Top Oil Dividend #3: Pioneer Natural Resources Company (NYSE: PXD)
Pioneer is one of my favorite oil companies. And it’s one of the best out there. Shares are up almost 50% over the past year. And management here is super smart. Trust me. I’ve had some long conversations with the CEO and CFO about Pioneer, business, and life in general. They don’t just go jumping into any oil field. There’s got to be a solid return on investment (ROI) for them and their shareholders.
They find a good field. Then they find some property in it to buy. But they don’t get involved in bidding wars. They set a top price they’re willing to pay — a price that gives a top-notch ROI. And that’s as high as they go. Even if it means missing out on some good sites. And that’s served shareholders very well.
The company pays a dividend of $0.08 per share. Yes, it’s a little small, but that’s because management refuses to have to cut it. So, they don’t promise more than they can deliver. And thanks to their wise investment strategy, the company is drilling in some of the best fields the world has to offer. So, I wouldn’t be at all surprised to see that dividend increase this year.
Top Oil Dividend #2: Occidental Petroleum (NYSE: OXY)
Occidental is another favorite of mine. It holds some of the best acreage in the world. And it shares lots of profits with investors. The company pays a 4.64% yield and has already started increasing the dividend. With 1.9 million acres in the Permian, OXY is the second-largest company in the area. And it’s ready to expand even further with $2 billion available in credit to buy more premium land.
Management also has access to a bank account with over $3.1 billion. That would pay the dividend three times over even without any money coming in. And that’s not something that’s going to happen anytime soon.
The operating cash flows are strong — enough to pay one and a half years’ worth of the $2.3 billion in dividends. And they’re going to grow even bigger, with oil increasing in price this year. Expect another pay hike for investors coming in the near future.
Top Oil Dividend #1: Chevron Corp. (NYSE: CVX)
Part of John D. Rockefeller’s former monopoly, Standard Oil, Chevron is one of the biggest and best players in the industry. It’s got a storied history of dividend increases, even when prices are falling. That’s because it’s well diversified when it comes to the regions it operates in. It’s a worldwide super-giant.
And it’s been growing payments to shareholders for 31 years! That’s not a trend that’s ending anytime soon. The company currently pays a 3.8% yield that works out to $4.32 per share. It’s also the biggest landholder in the prolific Permian oil fields with two million net acres. Debt is low. Credit is high ($8 billion waiting to be tapped). And CVX has great assets. Cash flows are growing again. And I expect to see a substantial dividend hike coming this year.
Thanks for Welcoming Me Aboard
So, there are three of the top dividend-paying oil companies out there. You’ll get handsomely paid just for your investment. And you’ll be looking at substantial stock price returns as well.
But you don’t have to stop with just them. Use the new tools I’ve shared today to go out and find more companies primed to deliver big dividends and huge profits in the coming years.
I’ll be writing to you every other week here at Energy and Capital now. And I’ll keep at it as long as they’ll let me. I’m looking forward to sharing everything I know and everything I learn along the way with you. And I’m excited to help you make the most of your energy investing dollars.
To investing with integrity (and building real wealth),
Jason Williams
Energy and Capital
Follow me on Twitter @AllBeingsEqual
