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Generate Energy Dividends Despite the Peak Oil Nonsense

Energy stocks remain a solid dividend play

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Peak oil is the idea that the world has reached or is about to reach maximum production of oil either a few years ago or a few years from now. From there on we are supposedly going to experience significant declines in oil production, which would have devastating impacts on the world economy, which would need more and more oil in the future.

This would be driven by the emerging economies of China and India, where hundreds of millions of consumers will enter the middle class, and demand the lifestyle of your typical American Consumer. This will be bullish for companies like Coca-Cola (KO) as well as energy companies like Chevron (CVX).

I find some of the cheapest stocks in the market today to be oil companies. I own stock in the following three oil companies:

Chevron, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company trades at 9.20 times earnings and yields 3.30%. This dividend champion has increased distributions for 26 years in a row and has achieved a ten year average annual dividend growth of 9.60%. Check my analysis of Chevron Corporation.

ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. The company trades at 10.10 times earnings and yields 4.20%. This dividend achiever has increased distributions for 12 years in a row and has achieved a ten year average annual dividend growth of 15.10%. Check my analysis of ConocoPhillips.

Royal Dutch Shell (RDS.B) operates as an independent oil and gas company worldwide. The company trades at 8.20 times earnings and yields 5.30%. The company ended a 16 year streak of consecutive dividend increases in 2010 by keeping distributions flat, only to start increasing them again in 2012. Check my analysis of Royal Dutch Shell.

I also used to own Exxon Mobil (XOM), but I replaced it with ConocoPhillips. Exxon is the largest oil company in the world. It engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. The company trades at 9.30 times earnings and yields 2.80%. Check my analysis of Exxon Mobil.

The thing to look for when evaluating energy companies is the reserve replenishment. Oil companies operate wells that will eventually run out of carbons, even if technologies are improved to a point where ALL the oil and gas in a well is pumped out. At some point, this well will stop producing income, and the company needs to move on. The reason why oil companies typically have low payout ratios is because they need to reinvest a portion of profits back into the business in order to find oil or buy assets they can develop.

I have looked at the data, and find that the idea behind peak oil is nonsense. The world is never going to run out of oil. That is, the world is never going to run out of oil during the lifetimes of anyone you meet today. The reason is that consumers will become more energy efficient, and companies will have an enormous incentive to explore and develop oil and gas fields in areas that are very difficult to drill in.

The basic economic theory states that companies which see high energy prices will allocate funds at areas that are tough to explore and that make sense if oil stays at high levels for extended periods of time.

Over the past 30 years, the reserve to production ratio has remained above 40 – 50 years. This ratio shows the total amount of estimated oil reserves dividend by the total amount of annual production. If no new oil reserves were discovered ever again, and the world continues to consume oil at the same rate as today, the world would run out of oil in 50 years. It looks like oil reserves have been increasing enough to satisfy future oil demand.

Therefore, it looks that for the past 30 years, the world has had anywhere between 50 -54 years’ worth of oil on its disposal. Right now, we have enough oil for the next 50+ years. I am betting ( see below how) that the world would have sufficient oil reserves for next 40 – 50 years in 2020, 2030 and 2040.

The same ratio for Natural Gas is over 60 years. The US is currently experiencing an energy renaissance particularly in such areas like Bakken Shale.

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