Oil prices have remained well above $100/barrel for most of this quarter and geopolitical fears may drive them much, much higher. As I've discussed in a previous article, the larger U.S. oil companies are not the best way to exploit soaring oil prices. The last time prices spiked above $100, Congress generated multiple proposals for "windfall profits" taxes that targeted "major integrated oil companies," which the Joint Committee on Taxation defines as follows:
Major integrated oil companies are a subset of integrated oil companies that (1) have average daily worldwide production exceeding 500,000 barrels per year, (2) had gross receipts in excess of $1 billion in 2005, and (3) own at least a 15 percent interest in a refinery that produces more than 75,000 barrels of oil per year.
In short, it means Exxon (XOM), Chevron (CVX), and Conoco (COP). A few larger companies like Anadarko (APC) and Devon (DVN) might escape because they don't own refineries. The windfall profits taxes were previously shot down by Republicans in Congress and the Republican White House. This time around, they have a much better chance of passing, particularly since President Obama made taxing oil companies a big point in his campaigns.
As a reminder, here's what happened to Chevron's stock after Carter's windfall profits tax passed.
Another Way to Invest in Oil
To capitalize on the surge in oil prices, we're looking for companies that are small enough to escape punitive taxes and are attractively priced. One set of companies that we think are particularly cheap are those with very high dividends which were previously thought to be at risk. If investors hate anything, it's a dividend cut; as a result they tend to over-react, both in anticipation and afterwards, to cuts.
At a sufficiently cheap valuation, we actually don't care if a dividend is going to be cut. Recently, the Canadian producer, Penn West (PWE) actually rose after cutting its dividend. In any case, with oil soaring past $100, many companies with supposedly risky dividends have now become much safer. Many of these companies hedge future production and can now secure their dividends with higher futures prices.
My favorite metric to screen for cheap oil companies is EV/BOEPD/Netback, which I discuss here. This metric is more useful than the basic EV/BOEPD number, because it also factors in the netback (how much the company actually makes per barrel). There's a bunch of Canadian oil companies that trade as low as $40,000/BOEPD. But they're no bargains because most of that BOEPD is natural gas, and their netbacks are only $20/BOEPD.
Running a screen on EV/BOEPD/Netback and dividend yields over 10%, I turn up the following companies.
|Eagle Energy Trust (OTC:ENYTF)||13.0%||$1771||$51|
|Mart Resources (OTCPK:MAUXF)||12.7%||$866||$75|
I have discussed Eagle Energy Trust in a previous article. Unlike most Canadian oil companies, Eagle's production is entirely within the U.S.; much of it fetches prices that are actually higher than WTI. The company has previously stated that its dividend is sustainable with $90 WTI oil, which gives it an 83% adjusted payout ratio. Going into the year with only half its production hedged and current prices averaging over $100, we don't see any risk to the 13% monthly yield in the near future.
Lightstream (formerly known as Petrobakken) is a Canadian producer which has been the subject of dividend cut rumors for years. Yet it continues to pay out month after month. With the payout ratio at 68% earlier this year when oil prices were much lower, we don't see much risk with oil above $100.
Mart Resources is a high-risk, high-return play, with all of its production being in Nigeria. Despite rumors about dividend cuts, the company has announced another dividend and will go ex-dividend on September 16. Other Seeking Alpha authors have written excellent articles on the company, for example here. I will provide an updated article on the company in the near future.