Energy stocks have long been intriguing for their ability to pay relatively high dividends. This article will dig deeper into the Oil and Energy sector to show trends within the individual industries, ranging from Oil Refining to Royalty Trusts to Coal to International E&P. First, the Oil and Energy sector, as defined by Zacks.com, consists of 603 companies with 229 paying some sort of dividend or distribution in the case of partnerships. This is 38% of all Oil and Energy companies, slightly above the overall market average of 36%. However, this sector distinguishes itself with a weighted average dividend yield of 2.9% which is substantially above the overall market average. This article is the continuation of two previous articles: part 1 and part 2.
Understanding the Energy Sector from a Dividend Perspective
The Oil and Energy sector contains a wide range of stocks (I'm going to generically include partnership units with stocks and use dividends to cover both dividends and distributions). The following table shows the individual industries with the number of stocks and dividend payers, as well as average yield for each industry.
Oil And Energy Industry Dividend Data
|Industry||Aggregate Market Capitalization ($ Billions)||Total Number of companies||Dividend Payers||Percent of Total||Average Yield|
|Refining & Marketing||163||37||22||59%||2.0%|
|Exploration & Production||573||215||48||22%||1.6%|
|Oil - Specialty||67||6||3||50%||1.5%|
|Oil Field Services & Eqp||318||66||21||32%||1.1%|
Source: Data provided by Zacks.com services, Author Calculations. Data is as of March 28, 2013. Alternative energy includes solar, biofuels and wind.
One can clearly see a couple trends. First is the general dominance of the oil and gas sector, which is substantially larger (and hence containing more subdivisions) than the other energy sources (e.g., coal, renewables). It should also be noted that these companies exclude electric utilities, which are aptly grouped in the utility sector.
Second is that the overall sector has just a 38% ratio of dividend payers to all companies. This ratio rises substantially for several industries: Partnerships/trusts (not much point if not), Integrated Oil, Refining and Marketing, and Pipelines. Integrated Oil includes most of the more recognized names and many of the consumer brands, including Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), BP plc (BP). It also includes less well known companies like CNOOC Ltd (CEO), a subsidiary of China National Offshore Oil Corporation and Lukoil Holdings (OTCPK:LUKOY).
The third point is that there is a wide range of size of typical companies. This can be seen from comparing the aggregate market capitalization of the industry with the number of stocks. Coal for example has 31 companies with an aggregate of $61 billion in market capitalization or about $2 billion per company. In stark contrast are the Integrated Oil companies with $2.7 trillion in aggregate market capitalization spread across just 44 companies for an average of about $60 billion or the entire coal industry.
The final key point to recognize is that the Nationals, which include some of the largest oil companies like Saudi Aramco and Petróleos de Venezuela, S.A., are not included since they are not publicly traded.
Pipelines provide compelling income opportunities
After Partnerships/Royalty Trusts, Pipelines have the highest rate of paying dividends as well as an above market average dividend yield. However, the average yield is below that of the overall sector due to the large contribution of Integrated Oil companies, which, by market capitalization, represent over half the sector. Pipelines are companies that are simply engaged in the transport of natural gas, LPGs and oil through pipelines. This infrastructure may also include compression, separation, treatment, and storage facilities, more commonly referred to as mid-stream assets. The following table shows the top six companies in the pipeline industry in terms of yield.
Select Pipeline Companies
|Ticker||Name||Market Capitalization ($ Millions)||Yield|
|NKA||Niska Gas Storage Partners LLC||880||10.9%|
|TGS||Transportadora de Gas Del Sur S.A.||265||9.9%|
|AMID||American Midstream Partners LP||164||9.7%|
|PVR||Penn Virginia Resource Partners LP||2,306||9.1%|
|CMLP||Crestwood Midstream Partners LP||983||8.6%|
|NS||NuStar Energy L.P.||4,154||8.2%|
Source: Data provided by Zacks.com services, Author Calculations. Data is as of March 28, 2013.
Niska Gas Storage Partners LLC (NKA) owns and operates natural gas storage facilities, including the AECO hub. NKA has paid a quarterly dividend of $0.35 per share for the past couple years. Growth may be a concern for NKA with its relatively flat revenue and no dividend increases. NKA has recently restructured its equity to eliminate dividend payments to subordinated units, saving $12 million per quarter.
Transportadora de Gas Del Sur S.A. (TGS) is a natural gas transporter with operations in Latin America. Of most importance to this analysis is that, like many Latin American companies, TGS pays a variable dividend and makes payments annually instead of the more common quarterly approach. Its most recent payment was announced with an ex-dividend date of April 3, 2013 of $0.145.
American Midstream Partners LP (AMID) is an operator of midstream assets located primarily in the southeast and Gulf Coast regions of the U.S. Having been founded in 2009, AMID has a relative short payment history. Its most recent distribution was $0.432 per share.
Penn Virginia Resource Partners (PVR) is primarily engaged in midstream gas asset management, but also manages some coal resources. PVR's most recent quarterly distribution was $0.55 per share. This has been keeping with a multi-year trend of raising the payment by a single cent per quarter.
Crestwood Midstream Partners LP (CMLP) also operates in the mid-stream gas sector with a primary focus on shale gas resources. Its four divisions are focused on specific resource areas, including the Barnett Shale, the Marcellus Shale, the Fayetteville Shale, and Granite Wash. CMLP has a distribution history going back to 2008, with consistent, but irregular, increases in payments. Given its high focus on shale gas regions, it could represent an interesting way to play shale gas.
NuStar Energy L.P. (NS) is the largest company on the list with market capitalization above $4 billion and a still attractive yield of 8.2%. NS has a long history of payments, but a slightly less impressive growth record than some of its smaller peers. It has also been two years since its last payment increase. Also, unlike many of the other companies listed here, NS is not exclusively focused on natural gas, but rather petroleum products (e.g., diesel, gasoline, asphalt, etc..) NS has 61 terminal and storage facilities with an aggregate capacity of over 80 million barrels. NS has a primary focus on midstream type of activities, but also has some downstream activities including the refining of crude oil into asphalt and other products.
It should be noted that many of these companies are relatively small despite their large yields. Some of the industry leaders also pay significant, but not amazing dividends. These companies include $23 billion capitalization Kinder Morgan Energy Partners LP (KMP) with a 5.8% yield, $54 billion Enterprise Products Partners L.P. (EPD) with a 4.4% yield, and $21 billion Williams Partners L.P. (WPZ) with a 6.4% yield. These three companies all have long track records of payments with consistent and attractive growth. EPD has increased its quarterly payment from $0.50 at the start of 2008 to $0.66 for its most recent payment. Furthermore, with 54 companies offering a dividend or distribution, there should be options to meet most investor's risk appetites.
Within the Oil and Energy sector, pipeline companies offer an attractive way to generate income. With low natural gas prices due to significant supply, these companies should continue to profit from handling this commodity. Of particular interest would be CMLP which represents a very direct play on shale gas opportunities. I would also consider the larger companies, including WPZ, with more stable prospects
This analysis represents a preliminary look at several pipeline companies. Additional research and analysis, including a fundamental valuation analysis, should be completed prior to making any investment decision.
Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.