3 Oil Stocks for High Yields

Thanks to the ongoing recovery of global oil consumption from the pandemic, oil stocks have been among the market's top performers over the last 12 months. However, due to the high cyclicality of this sector, which results from the wide swings of the prices of oil and gas, investors should be especially careful in their stock selections. These 3 oil stocks have high dividend yields with a wide margin of safety. Exxon Mobil Exxon Mobil is the largest oil and gas company in the world, with a market capitalization of $267 billion. 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 faced a perfect storm last year due to the coronavirus crisis and the resultant social-distancing measures, which caused an unprecedented collapse in the global demand for refined products and chemicals. Not only did the price of oil plunge, but also the margins of the refining and chemicals segments shrank to decade-low levels. Consequently, the oil giant incurred its first loss in more than a decade. However, thanks to the massive distribution of vaccines worldwide, global oil consumption has surged this year and is expected to return to the pre-pandemic level next year. In addition, OPEC and Russia have maintained tight production quotas and hence they have led the price of oil to rally to a seven-year high. Thanks to this tailwind and the recovery of refining and chemical margins, Exxon is recovering strongly this year. In the third quarter, Exxon grew its production in the Permian 30% over last year's quarter but its total production remained essentially flat. Nevertheless, thanks to the rally of the prices of oil and gas, Exxon switched from an adjusted loss of $0.18 per share in last year's quarter to an adjusted profit of $1.58 per share, the highest in more than five years. Even better, the oil major is on track to post seven-year high earnings per share in the full year. Due to the impact of the pandemic on the business of Exxon, its dividend came under great pressure last year. The oil giant paid the same dividend for 10 consecutive quarters and many analysts were expecting that the company would cut its dividend due to its negative free cash flows. However, as the downturn proved short-lived, Exxon defended its dividend and raised it by 1% in the fourth quarter. It thus extended its dividend growth streak to 39 consecutive years and maintained the longest dividend growth streak in the oil industry. Exxon is offering a markedly high 5.7% dividend yield. Given the current payout ratio of 70% and the healthy balance sheet of Exxon, its dividend is safe in the absence of a severe downturn. Moreover, management has made it clear that the dividend is its top priority. The company has postponed some growth projects in order to preserve funds for its generous dividend. As a result, its dividend has become safer, though investors should not expect material production growth over the next five years due to this policy. Phillips 66 Phillips 66 was spun off from ConocoPhillips in 2012. It operates in four segments: refining, midstream, chemicals, and marketing. The refining segment includes 13 refineries with total capacity of 2.2 million barrels per day (2% of global capacity) while the midstream segment includes approximately 22,000 miles of pipelines in the U.S, which transport crude oil, refined products, natural gas liquids and LPG. Phillips 66 was not immune to the fierce downturn caused by the pandemic last year. Its refining segment, which is the most profitable segment under normal conditions, incurred hefty losses for the first time in a decade. The midstream and chemical segments of the company performed much better than its refining division but still Phillips 66 posted its first loss last year. Nevertheless, Phillips 66 proved much more resilient than pure refiners and oil producers last year, as it posted an adjusted loss of only $0.89 per share last year. Moreover, Phillips 66 greatly benefits from the ongoing recovery of the global energy market. In the third quarter, its refining margins more than doubled sequentially and hence the refining segment switched from adjusted pre-tax losses of $706 million to an adjusted profit of $184 million. It was the first profitable quarter for this segment since the onset of the pandemic. In addition, the midstream, chemicals and marketing segments posted strong earnings thanks to pent-up demand. As a result, Phillips 66 more than quadrupled its EPS sequentially, from $0.74 to $3.18 per share, and thus it exceeded the analysts' consensus by an impressive $1.26. Due to the pandemic, Phillips 66 froze its dividend for 10 consecutive quarters. However, thanks to its ongoing recovery, it raised its dividend by 2% in the fourth quarter and thus it has now raised its dividend every year since its formation in 2012. Moreover, the stock is offering a 5.2% dividend yield. The payout ratio is currently elevated, at 92%, but it is likely to greatly improve next year, provided that the pandemic will not take a turn for the worse. It is also worth noting that Phillips 66 has an exemplary management, which is laser focused on investing exclusively in high-return growth projects. Overall, Phillips 66 is likely to grow its earnings significantly off this year's somewhat suppressed level and hence investors should rest assured that its 5.2% dividend will remain safe. Enbridge Enbridge is a midstream oil and gas company, which is headquartered in Canada and operates in four segments: Liquids Pipelines, Gas Transmission, Gas Distribution and Green Power. These segments generate 53%, 29%, 13% and 5%, respectively, of the total EBITDA of the company. Enbridge is a gigantic midstream company. Through its immense pipeline networks, the company transports approximately 25% of North America's crude oil and 20% of the natural gas consumed in the U.S. It is also the largest distributor of natural gas in the U.S. by annual volumes. Most oil and gas companies have volatile results due to the cycles of commodity prices but this is not the case for Enbridge, which has proved markedly resilient to the downturns of the energy sector. The key behind the resilience of Enbridge is its toll-like, fee-based model, which relies on charging fees to customers for the products it transports through the pipeline networks of Enbridge. As the contracts have minimum-volume requirements, Enbridge enjoys reliable cash flows even under adverse business conditions, when its customers transport lower volumes than normal. The defensive business model of Enbridge is clearly reflected in the outstanding performance of the company throughout the pandemic. While most energy companies incurred losses last year, Enbridge grew its distributable cash flow per share 7% last year, to a new all-time high. Even better, the company is on track to post another record in its distributable cash flow per share this year. Moreover, Enbridge has grown its dividend (in CAD) for 26 consecutive years, at a 10% average annual rate. It is also offering an attractive 7.2% dividend yield. The company has a healthy payout ratio of 69% and is likely to continue growing its distributable cash flow thanks to its promising pipeline of growth projects, which involve the expansion of its immense network. Final Thoughts When a stock offers a high dividend yield, investors should perform their due diligence in order to make sure that a dividend cut is not just around the corner. Exxon, Phillips 66 and Enbridge are offering remarkably high dividend yields, with a wide margin of safety. They are attractive oil stocks for income investors.

3 Oil Stocks for High Yields

These names not only have high dividend yields they offer a wide margin of safety.

Columnist Conversation

This Weekend on Real Money

This Could Get Messy

Latest AAP Podcast With Helene Meisler!

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.