Big oil stocks have been decidedly soft across the last year or so. This includes megacap Exxon Mobil (NYSE:XOM), up just 7% in the past 12 months vs. 18% for the S&P 500 Index. BP (NYSE:BP) also is up about 7% in the same time frame, and Occidental Petrolum (NYSE:OXY) is up a mere 2%.
Sure, refineries like Tesoro (NYSE:TSO) and Marathon Petroleum (NYSE:MPC) went on a tear, thanks largely to a spread between West Texas and Brent crude prices … but the momentum is waning, and most energy companies have been left behind.
But if you believe that a cyclical recovery is in the works for the next few years, then the energy sector might not be a bad place to look. After all, a more robust economic outlook means bigger demand for crude and subsequently bigger profits for oil stocks.
Obviously you’ll have to be patient, especially after some recent news and data regarding China’s slowdown and stagnant U.S. GDP. But what if you can grab a juicy dividend to offset some of that underperformance while you wait, then be in great position once the oil demand picks up?
That’s exactly what these three picks provide.
If you like smaller oil stocks with a big dividend, I recommend Seadrill (NYSE:SDRL), an offshore drilling contractor with a nearly $19 billion market cap. Its dividend is a bit volatile and unreliable, but adding up the last four paydays produces an 8.8% yield based on current prices.
Furthermore, revenue is slowly creeping up and earnings per share are much more stable. The dividend payout ratio is admittedly a concern since it’s pushing above total earnings per share this fiscal year, and there’s a risk that distributions might roll back if earnings don’t keep pace. But you could take a 40% haircut on your dividends and still enjoy a yield over 5% in SDRL stock. Seadrill is up about 8% year-to-date in 2013.
Unlike a lot of speculative small caps, Seadrill is both big enough to be entrenched and agile enough to ramp up growth in a good environment.
Baytex Energy (NYSE:BTE) develops petroleum and natural gas properties in Canada and has a $5 billion market cap. The stock yields 6.4% and pays its 22-cent dividend (about 70% of profits) like clockwork each quarter.
But Baytex’s exposure to natural gas is a double-edged sword. The diversification was good in 2010 as gas prices crept up off the bottom, but became an anchor on shares across 2012 as natural gas prices softened once more.
Right now, gas prices are once again moving down toward those low 2012 levels thanks to a warmer winter and weak demand overall. As such, Baytex is about 7% in the red in 2013 despite a rally across the broader market.
But natural gas prices seem pretty close to a floor, and the crude operations of Baytex should help prop up earnings in the second half of the year. The stock has already rebounded sharply in the last few weeks, up 13% since April 18, and seems to have a wind at its back again.
And the 6.4% yield should give you the patience to wait out bumps in the road.
Prudhoe Bay Trust
BP Prudhoe Bay Royalty Trust (NYSE:BPT) is a “depletion trust,” which means it’s essentially just a shell company that cranks out oil, gets paid for it, and passes on the proceeds to investors in the form of dividends. The good news is that the company yields a mammoth 10.7% dividend, and that payout will only go up as crude prices rise and the sales are more lucrative.
The bad news? Well, when the oil is gone, BPT goes to zero.
The trick, then, is to figure out how long to ride BPT. It’s worth noting that in the latest annual report, issued in December 2012, BPT says that “Royalty payments to the Trust are projected to cease after 2029.” So you have plenty of daylight here.
Obviously this is not a set-it-and-forget-it investment. But you can make a pretty nice chunk of change of the Prudhoe Bay income for a few years. Just make sure you get out before the wells run dry or else your dividends will be offset by the race for the exit on shares.
Or heck, if you like income, consider holding forever. The last four distributions tally $8.87. At $80 a share, you can hold the stock for a little more than nine years, then every payout after that is pure profits until the lights go out.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.