Every major sector has felt the wrath of the novel coronavirus pandemic. However, some industries have completely buckled under pressure — in particular, oil and gas.
Oil stocks are a major casualty of the current crisis, and it’s hard to find a name that is not currently flat or down on the year as of this writing.
The United States Oil Fund, LP (NYSEArca:USO), a proxy for U.S. crude prices with a portfolio mostly of short-term NYMEX futures contracts on WTI crude oil, is down more than 73% YTD. Meanwhile, the iShares U.S. Energy ETF (NYSEArca:IYE) has shed 45.9% of its value in the period. The exchange-traded fund’s 38 stocks represent a who’s who of America’s oil producers.
However, a few oil and gas companies are offering a stable revenue stream despite the pandemic. These are all New York Stock Exchange-listed stocks offering a dividend yield of more than 5%:
- Exxon Mobil (NYSE:XOM)
- NuStar Energy (NYSE:NS)
- Chevron (NYSE:CVX)
- China Petroleum & Chemical (NYSE:SNP)
- Kinder Morgan (NYSE:KMI)
Safe Oil Stocks: Exxon Mobil (XOM)
Dividend Yield: 9.65%
Exxon Mobil is still one of the largest publicly traded oil companies in the world. Needless to say, the collapse in oil prices hasn’t been great for the XOM stockholders. And with oil prices still around$40/barrel WTI, it’s unlikely that the situation will change soon. Until demand returns to pre-pandemic levels, the company will have to cut costs and increase efficiency.
In the meantime, several analysts are wondering what will happen to the company’s dividend — one of the highest in the sector. Surely, Exxon will have to look to cut its payout at some point since the company needs to build up its cash reserves.
But at this point, the dividend has become a matter of prestige for the oil giant. That’s why I don’t think that a cut is around the corner.
Also, it’s not exactly like the company is resting on its laurels. It has decreased cash operating costs by 20% year on year and will spend roughly $17 billion this year in capital expenses. That’s down from $30 billion in annualized capital spending budget it had originally approved for the year.
With that in mind, I think that the dividend continues to be safe as we wait for demand to return.
NuStar Energy (NS)
Dividend Yield: 14.35%
NuStar Energy is one of the largest independent liquids terminal and pipeline operators in the country. It controls and operates 10,000 miles of pipeline and 75 terminal and storage facilities, predominantly in the middle of the Midwest. Although Covid-19 hasn’t spared any part of the U.S., petroleum consumption in the middle of the country has not collapsed.
That should help the company maintain its juicy dividend yield. But the important thing is that the company is not waiting for oil prices to return to normal. Instead, it’s making aggressive moves to drum up cash and bolster liquidity. Post Q3, it sold its Texas City terminals for $106 million. Also, it reduced its CAPEX for 2020 to between $165 million and $185 million — a 45% drop from its initial guidance and 63% below its year-ago outlay.
Now let’s talk valuation. NS stock has strengthened quite a bit since its mid-March lows. However, the stock is still trading at a 88% discount to its 52-week high of $29.36 a pop. With a commercial vaccine expected next year, I believe shares offer tremendous value, reflected in the 12-month price target of $16.30 per share, a 43.1% upside to current rates.
Dividend Yield: 6.4%
Exxon and Chevron are “dividend aristocrats” — companies in the S&P 500 index that have raised their dividends for 25 years in a row or longer. So, it should come as no surprise that Chevron is on this list. I think investors will be more interested in the fact if the company can maintain its dividend. On that note, I believe it’s on the right track.
Over the last few years, its financial metrics have taken a beating due to depressed oil prices and demand. However, the company operates one of the largest fully integrated energy supply chains in the world. It supplies 13,000 branded service stations and 70 airports worldwide.
Chevron has also been focused on deleveraging, with the company actually reducing its debt from 2015 to 2019. That, coupled with the fact that we should start seeing growth next year, instills confidence that it can maintain rich payout ratios.
At the same time, it is expanding with the July acquisition of Noble Energy in a $5 billion all-stock transaction. The deal expands Chevron’s presence in Colorado’s DJ basin and the Permian basin, and gives it assets in the eastern Mediterranean and West Africa. Chevron is targeting potential annual cost savings of $300 million with the acquisition.
China Petroleum & Chemical Corp. (SNP)
Dividend Yield: 9.59%
China Petroleum & Chemical Corporation, or Sinopec, is a state-run Chinese oil and gas enterprise valued at nearly $70 billion. It has varied interests, including but not limited to oil and gas exploration, refining, and marketing. Because the Chinese government backs it, you get a sense of stability when investing in this stock — sort of a “too big to fail” kind of situation.
So, even if Sinopec is suffering from a lack of cash flows due to the pandemic, it’s not like the company will shutter shop and discontinue operations. And while there is no protection out there for the fluctuating oil prices, the chance of a dividend cut is slim because of the enterprise’s size and the state forces backing it.
Kinder Morgan (KMI)
Dividend Yield: 8.0%
We finish off this list of oil stocks with one of North America’s largest energy infrastructure companies, Kinder Morgan. It specializes in owning and controlling oil and gas pipelines and terminals. In total, KMI owns and operates roughly 85,000 miles of pipelines and 152 terminals, so any major oil company will be using Kinder Morgan to bring its products to market.
The company has a market capitalization of more than $25 billion, and KMI stock currently offers an 8% dividend yield. Like most midstream companies, KMI faces risks of a long, drawn-out recovery, leading to reduced capital spending and volumes. However, the company is not just dependent on oil.
It also has deep interests in natural gas, which should help it stem the tide until it gets the opportunity to renew its fee-based contracts.
Now let’s talk about the dividend. Kinder Morgan is committed to its $1.05 annualized dividend and $1.25 annualized dividend in the longer term, which it will consider at its January 2021 board meeting.
A double-digit yield at current prices is scarce. And even though times are tough, the company continues to invest heavily in capital expenditures that should keep the enterprise in good stead as it waits for oil prices to return to normal.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.