When dividend stocks fall, investors should get more excited. The yield rises and the market gives investors a chance to average down. In the energy sector, where dividend stocks offer rich yields, perfectly timing the stock buy is nearly impossible to do. The pricing action for oil is unpredictable. For example, on Mar. 8, oil prices fell 5% after the U.S. Department of Energy reported 8.2 million BOE inventory — analysts expected just 2 million. This sent my BP plc (ADR) (NYSE:BP) stock lower.
Markets will rightfully question the sustainability of BP stock’s rich dividend, which is around 7%.
The more oil prices fall, the harder it is for the company to declare the same payout this year. The BP dividend does have a cushion: The company sold over $55 billion in upstream assets over the last two to three years. At that time, oil sold at $100 a barrel. BP still has deep levels of cash and the company has the option to sell more assets if the energy market worsens.
BP Stock Holds Up
The 5% daily drop hurt other energy stocks more than it did with BP. Marathon Oil Corporation (NYSE:MRO) fell 8.7% on Mar. 8, while Devon Energy Corp (NYSE:DVN) fell 6.5%.
Why did these stocks fall heavily? DVN shares trade at a forward price-to-earnings ratio of 14.5x. MRO’s forward P/E is an unsustainable 57x. Neither of these companies paid a rich dividend like BP stock’s dividend.
The energy sector obviously depends on where oil prices are at. In the sub $50 per barrel level, markets get very nervous. On the natural gas market, traders get even more nervous, because the material is more volatile, at least in pricing terms. Just look at Chesapeake Energy Corporation (NYSE:CHK). The stock showed a “double top” at $8 per share and trended lower, month after month, since December.
What Happens to BP if Oil Falls to $20/bbl?
In the unimaginable event that oil prices fall by over half, to $20 per barrel, BP shareholders will be in trouble. The good news is, every other energy play will be worse off.
BP has the option of switching from asset seller to asset buyer. Buying up bankrupt firms at distressed prices would benefit shareholders with a long-term time perspective. Energy demand cycles between strong and weak, and the market is still working off excess output and supply.
Country policies may change in the months ahead, drastically altering demand for global oil. The U.S. is entering a protectionist policy, meaning it favors domestic consumption of locally made goods. For the energy market, demand may weaken globally, but limiting imports will strengthen prices for local markets. Therefore, BP’s strong presence, commitment to clean energy and investments in the U.S. will work in its favor.
Ultimately, BP stock’s long-term uptrend that began last year in June is holding. The stock’s recent pullback is creating another entry point for investors who believe energy markets are dirt cheap. If oil supplies fall in the years ahead, today’s stock prices will look that way years down the road.
As of this writing, Chris Lau held BP shares.
