3 Big Oil Stocks With Big Dividends

The energy sector was one of the worst performers last year due to the coronavirus pandemic, which put a huge dent into demand for oil. However, thanks to the massive distribution of vaccines and the aggressive production cuts of OPEC and Russia, the price of oil has rallied to a three-year high this year. As a result, the energy sector has been by far the best-performing sector of the stock market this year. Here, we will discuss the prospects of the three largest oil companies in the world, namely Exxon Mobil , Chevron and Royal Dutch Shell . These oil giants will greatly benefit from the rally of the price of oil and they are offering high dividend yields right now. High Yield Oil Stock #1: Exxon Mobil Exxon Mobil is the largest oil and gas company by market capitalization. It produces oil and natural gas at a 60/40 ratio and is one of the most integrated oil majors, with significant contribution from its refining and chemicals segments. Exxon encountered a perfect storm last year and thus posted its first loss in more than a decade. On the bright side, thanks to the distribution of vaccines worldwide, the pandemic has begun to subside. In addition, OPEC and Russia have implemented deep production cuts to support the price of oil amid the pandemic. As a result, oil prices have rallied to a three-year highs in 2021. As this is the most important determinant of the earnings of Exxon, the oil major will greatly benefit from this factor. Last year, the company paid $14.9 billion of dividends whereas it posted negative free cash flows of -$1.3 billion. It thus incurred an excessive cash flow deficit of $16.2 billion. However, thanks to the sharp rally of the oil price, Exxon is likely to cover its dividend this year. Exxon has grown its dividend for 38 consecutive years and thus it is a Dividend Aristocrat. It is also the oil company with the longest dividend growth streak and currently offers a 5.5% dividend yield. In the absence of another downturn in the energy sector, the oil major is likely to continue raising its dividend, albeit at a slow pace. Exxon now has two strong growth drivers, its reserves offshore Guyana and the Permian Basin. Guyana is one of the most exciting projects in the oil industry. Exxon has nearly tripled its reserves in the area, from 3.2 billion barrels in early 2018 to nearly 9.0 billion barrels now. The company also expects to grow its output in the Permian Basin, from 400,000 barrels per day this year to 700,000 barrels per day in 2025. Thanks to these two growth drivers, Exxon was expecting until recently to grow its production from approximately 3.8 million barrels per day to 5.0 million barrels per day until 2025. Oil Stock #2: Chevron Chevron is the third-largest oil major in the world based on its market capitalization of $207 billion, behind only Royal Dutch Shell and Exxon. Chevron is more sensitive to the price of oil than its peers. In addition, it has become much more resilient to downturns in recent years. Even in 2020, which was marked by the fiercest downturn in the history of the energy sector, Chevron posted free cash flows of $5.6 billion. Moreover, Chevron has promising growth prospects ahead. The company grew its production by 5% per year on average in 2017-2019. Even in 2020, when most oil producers curtailed their output amid the pandemic, Chevron grew its production 1%, assisted by its acquisition of Noble Energy, which enhanced the presence of Chevron in the Permian Basin. Furthermore, Chevron has outperformed its peers by a wide margin in the replenishment of its reserves. During the last five years, Chevron has posted a reserve replacement ratio of 99%, which is much higher than the average performance of its peers. The superior reserve replacement of Chevron bodes well for its growth prospects. Chevron has more than doubled the value of its assets in the Permian in the last two years thanks to new discoveries, technological advances and the acquisition of Noble Energy while it also expects significant growth from its projects in Australia. As a result, Chevron expects to grow its production by 3%-4% per year on average in the upcoming years. The company has grown its dividend for 34 consecutive years and thus it is a Dividend Aristocrat. Despite the coronavirus crisis, the oil major raised its dividend by 8% last year and by another 4% this year. Chevron currently offers a 5.2% dividend yield. Oil Stock #3: Royal Dutch Shell Royal Dutch Shell is an oil and gas giant, the second largest behind Exxon Mobil in terms of annual production volumes. Shell was severely affected by the pandemic last year but performed better than most of its peers. Due to the slump in the global oil consumption, the company incurred a 70% plunge in its adjusted earnings per share. Nevertheless, thanks to its integrated business model, it remained profitable, in contrast to most of its peers. In 2015, when oil prices were around their lows, Shell acquired BG Group, a deep-water oil and gas upstream company, for $53 billion. Shell grew its output significantly thanks to that acquisition, but its output has stalled in the last four years. Moreover, Shell announced last year its intention to cut its oil and gas cost of production by 40% in order to shift its focus on renewable energy sources. The company will transform its refining portfolio from 14 sites to six energy and chemicals parks and will reduce its upstream portfolio to nine core positions, which will generate more than 80% of the cash flows of the upstream segment. It also expects to produce ~75% of its proved reserves until 2030. This historic transition has greatly increased the uncertainty over future results, as the new business will probably have lower margins. Given the ongoing transition in the energy landscape, the strategic shift of Shell is certainly in the right direction. However, the margins of the new business are likely to be lower than the margins of oil and gas production. Thanks to the ongoing recovery of its business, which has resulted from the rally of the oil price and the improved demand for refined products, Shell has raised its dividend twice since it cut its dividend last year. However, it is currently offering a 3.6% dividend yield, which is much lower than the aforementioned yields of Exxon and Chevron. On the bright side, Shell has a markedly low payout ratio of 32%. Thanks to the exceptionally low payout ratio of Shell, its dividend is not likely to come under pressure, even when the next downturn of the energy sector shows up. Final Thoughts Energy stocks are recovering strongly from the pandemic this year. Thanks to the ongoing recovery from the pandemic, the unprecedented production cuts of OPEC+ and the lack of investment projects in the last two years, this sector is at the upper part of its cycle right now. Nevertheless, investors should be aware that this sector is highly cyclical and hence they should select the stocks with the most resilient business models in the long run. On the one hand, Chevron seems to have the most promising growth prospects among the three oil giants. On the other hand, despite its relatively low dividend yield, Shell seems to be the safest choice right now thanks to its current cheap valuation and the safety of its dividend.

3 Big Oil Stocks With Big Dividends

Let's analyze the payouts and prospects for Exxon, Chevron and Shell.

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