Even as the stock market rises to record highs, oil prices have been experiencing some weakness. This has put pressure on certain stocks in this sector and it's providing investors with a solid buying opportunity that may not last long. If the economy is truly in a long-term rebound, the demand for oil is likely to eventually rise and that can fuel higher share prices in this sector.
Dividends also remain extremely important to many investors and with the Federal Reserve planning to keep rates low for what could be a couple more years, investing in stocks that provide high yields and dividend growth, or both is likely to pay off. With that in mind, here are a few oil sector stocks that offer strong dividend income, plus upside potential:
NGP Capital Resources Company, Inc. (NGPC) is a stock that more investors should get to know. This company is focused on investing in the oil sector. It makes these investments through royalty interests, secured debt, senior debt, subordinated debt, convertible debt, and equity. In return, it receives interest payments, dividends, and royalties. Plus, it also can profit from gains made on the sale of equity and other investments.
This company has invested in a wide range of companies, some of which include: Black Pool Energy Partners, LLC., Tammany Oil and Gas, LLC., Rubicon Energy Partners, LLC., Crestwood Holdings, LLC., and many others. It also has some investments in other sectors. By investing in many companies, NGP is able to lower risk through diversification and yet still provide shareholders with a very attractive dividend.
NGP Capital is set up as a business development company or "BDC." These types of companies typically reward shareholders with a higher-than-average dividend yield and this makes stocks in this sector particularly attractive for income investors. NGP Capital pays 64 cents per share in dividends on an annual basis. This provides shareholders with a yield of about 9%. NGP Capital's last quarterly dividend payment of 16 cents was made on December 26, 2012. The dividend payment for the first quarter is usually around the end of March. Last year, it was paid on March 29, so investors who buy shares now are likely to get a dividend payment in the near-term and the company should be declaring the payment date for the first quarterly dividend of 2013 soon.
NGP Capital has risks that are typical of investing in debt or equity of other companies. However, management has a solid track record for the challenges that come with this industry. Furthermore, the risk to reward ratio seems very positive for investors right now since this stock appears to be a bargain. While a sharp drop in oil prices could put downside pressure on all stocks in the oil sector, this risk seems limited. Furthermore, the strong dividend is likely to support this stock in any market downdraft. NGP Capital looks very undervalued based on the dividend yield and also the book value, which is about $9.74 per share. The company has been buying back stock and it has authorized the purchase of up to $8.4 million worth of additional shares. That is another sign that the stock is undervalued and as the company buys shares, it can boost future earnings and increase the book value for remaining shareholders. If this stock were to trade at book value, this would provide substantial upside from current levels and add to the already generous yield this stock offers.
Here are some key points for NGPC:
Current share price: $7.10
The 52-week range is $5.87 to $7.98
Earnings estimates for 2013: 78 cents per share
Earnings estimates for 2014: 88 cents per share
Annual dividend: 64 cents per share, which yields about 9%
Seadrill Limited (SDRL) is a leading provider of offshore drillships,
jack-up rigs, semi-submersible rigs and tender rigs. Since this is a relatively young company, the fleet of equipment it operates is one of the most modern in the world. Newer equipment is not only more desirable for oil and gas companies, it is also less expensive to maintain and less prone to breakdowns.
Seadrill is already one of the largest companies in this industry and it is continuing to expand. It currently operates about 73 units in both shallow and ultra-deepwater areas. The company is planning for growth and it expects to add 10 new rigs to its fleet in 2013 and several more are to be added in 2014 and beyond. This should help the company address a backlog worth billions of dollars.
This company is clearly focused on returning profits to shareholders through dividends. Seadrill's website states: "Our primary objective is to profitably grow our business to increase long-term distributable cash flow per share to our shareholders." Furthermore, as earnings have grown over the past several years, the dividend has been increased substantially. In 2007, Seadrill paid a quarterly dividend of 25 cents per share. However, thanks to regular increases, the quarterly dividend payment is now 85 cents. That provides a yield of roughly 9%, which is very attractive in a low interest rate environment. Plus, as earnings grow through fleet expansion, the share price also has upside potential.
A big drop in the price of oil could put pressure on this and many other stocks in this sector. Companies like Seadrill can have equipment deployed in harsh environments and adverse climate conditions which can increase operational risks. Another factor to consider is the balance sheet. This company has about $764 million in cash and around $11.67 billion in debt. That is a substantial amount of debt and this leverage could increase risks for investors, particularly in a global economic downturn. However, management has been successfully managing these and other challenges and the stock continues to offer an enticing yield that appears poised to rise in the future.
Here are some key points for SDRL:
Current share price: $37.30
The 52-week range is $31.37 to $41.95
Earnings estimates for 2013: $2.99 per share
Earnings estimates for 2014: $3.78 per share
Annual dividend: $3.36 per share, which yields 9%
Chevron Corporation (CVX) is a solid choice for investors seeking income for more than one reason. First of all, while the yield might not be as high as some of the other picks mentioned here, this company offers a yield of 3% which beats many alternatives, but more importantly, it has the potential to raise it in the future. The current yield is important, but dividend growth can be a major factor to consider. Chevron appears poised to grow earnings and the dividend in the coming years.
Chevron has a number of high-potential oil and gas projects which include: The Gorgon liquefied natural gas project. This project is expected to start in 2014, and with a cost of about $52 billion, this is the largest energy project in the world. Chevron's "Wayfra" oil fields in Saudi Arabia and Kuwait could hold many billions of barrels. A $10 billion liquefied natural gas project in Angola is starting in 2013. Chevron also has projects in the "Duri" oil fields in Indonesia, a share of the "Tengiz" oil field in Kazakhstan, the Marcellus Shale, Nigeria, Permian Basin, and many others. With these and other projects, Chevron plans to increase production by about 20% in the next four years.
With production growth, earnings should also rise and that can lead to dividend increases. Chevron has a strong history of raising the dividend and it has increased it for 25 consecutive years. In 2006, the quarterly dividend was 45 cents per share, but thanks to regular increases, it has doubled to 90 cents per quarter. Analysts expect this company to earn over $12 per share in both 2013 and 2014. That puts the payout ratio at just about 30%, which leaves plenty of room for more dividend increases.
Here are some key points for CVX:
Current share price: $118.25
The 52-week range is $95.73 to $119.11
Earnings estimates for 2013: $12.33 per share
Earnings estimates for 2014: $12.31 per share
Annual dividend: $3.60 per share, which yields 3%
ConocoPhillips (COP) is a leader in the exploration and production of oil and gas. This company is based in the United States and it has a substantial reserve and production base in North America. However, it also operates in dozens of other countries around the world which diversifies risks and adds opportunities. In 2012, this company did a spin-off of its refining operations and this unit now trades as Phillips 66 (PSX). This allows ConocoPhillips to be a pure play in exploration and production.
ConocoPhillips recently reported solid financial results. In the fourth quarter of 2012, it earned $1.43 billion, or $1.16 per share. Excluding certain charges, it earned $1.76 billion, or $1.43 per share. This was slightly above consensus estimates of around $1.42 per share. Analysts expect this company to earn $5.04 in 2013 and for earnings to grow to $6.01 per share in 2014. Rising earnings could position the stock price to appreciate and also allow the company to continue with the solid history of dividend increases.
ConocoPhillips is a great choice for income investors as it offers a yield of nearly 5%. It also has a history of raising the dividend. In 2008, the quarterly dividend was 47 cents per share, but with regular increases, it now pays 66 cents per quarter. That is a dividend growth rate of about 50%, in just 5 years.
ConocoPhillips has been a popular stock for many dividend investors and it has even attracted the likes of Warren Buffett who has had a substantial position in this company for a number of years. In January, this stock was trading for about $61, but a recent pullback has created a buying opportunity which adds to the upside potential.
Here are some key points for COP:
Current share price: $58.73
The 52-week range is $50.62 to $78.29
Earnings estimates for 2013: $5.50 per share
Earnings estimates for 2014: $6.01 per share
Annual dividend: $2.64 per share, which yields 4.5%
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.