Why turn to energy stocks for dividends? Perhaps because man cannot live by technology alone. Demand for energy is global and growing. The Middle East is in turmoil, threatening a major source of supply, and prices of energy stocks are rising throughout the industrialized world. High and rising energy prices contribute to income for energy companies which can, in turn, afford to pay attractive dividends to shareholders. If you can add rising stock prices to rising dividends, the answer to "why energy stocks" writes itself. Here are some examples of different types of energy equities.
Shares of Seadrill Limited (SDRL) were selling at about $35 per share recently, near the top of their 52 week range of $24.68-$38.49. The company also plans an IPO on the Brazilian exchange in February for its Brazilian subsidiary, Seabras. The offering could raise as much as $1 billion for expansion and SeaDrill is expected to retain control of a majority of the shares. Despite the recent rise, the stock's price earnings ratio was still an unassuming 8.9%, with a dividend yield of 8.5% on earnings of $3.96. The disruptions caused by the 2010 drilling disaster in the Gulf of Mexico continue to be a concern, but Seadrill expects that region-- as well as sites off the coast of Brazil and Africa-- to be profitable areas for deep-water drilling units.
As part of its efforts to keep ahead of competitors like British Petroleum (BP), Seadrill emphasizes the quality of its employees, who have long duration contracts and are paid premium day rates. The company has focused on building out its fleet of offshore rigs from five in 2005 to over 60 in 2012. Despite a hefty payroll and active program of building and acquisitions (or perhaps because of it) Seadrill has been able to consistently grow revenue, earnings and dividends over the years. As of the end of September 2011, the company had an orders backlog of $13.5 billion, and all of Seadrill's operational units received customer assessments of either good or excellent. A combination of its commitment to dividend growth, high payroll, and active modernization program means that Seadrill has a high debt level ($8.9 billion), but management believes this level is sustainable. In fact, the company has been able to consistently grow revenue, earnings and dividends in the past several years.
Sabine Royalty Trust (SBR) could be described as a dividend machine, collecting money in the form of royalties and mineral interest from Sabine Corporation and using the income (net of expenses) to pay shareholders. The Trust's monthly dividend, payable at the end of January, was estimated at $0.36 per share, for an annual dividend of $4.02 and a yield of 7.20%. The stock was selling at more than $62, with a price earnings ratio of 15.4%. During the past 12 months shares sold for a low of low of $47.43 and a high of $70.54.
Texas-based Sabine Royalty owns royalty and mineral interests in various properties in the United States in both producing and proved, undeveloped areas. Unlike most corporations, its profits are not taxed at the corporate level as long as at least 90% are distributed to shareholders, so the dividends avoid double taxation. The catch is that U.S. royalty trusts like Sabine are not allowed to acquire additional properties once they are formed, so their royalties may be depleted over time. For the time being, however, as long as oil prices remain high, Sabine shareholders will continue enjoy a high income taxable only once, as personal income to each shareholder. Canadian royalty trusts like Prudhoe Bay Royalty Trust (BPT) are allowed to buy additional properties and take on debt like regular corporations, but Canada is in the process of passing legislation that will tax oil trusts at the corporate rate of 31.5%. One additional caveat for dividend-hungry investors is that income from energy trusts like Sabine tends to be sensitive to change in interest rates, rising when they advance and falling when they decline.
MVO Oil Trust (MVO) is similar to a royalty trust, except that it does not own any properties; the company serves as a trust for MV Partners, which owns oil and natural gas properties in the mid west region of the United States. Units sold recently around $42, near the top of their 52-week range of $32.74 - $46.76. Shares are popular for their 8.10% yield based on quarterly dividends totaling $3.32 in 2011. Current price earnings ratio was 13.1% on earnings of $3.14 per share. The company's quarterly dividends have ranged from $0.82 per share to $1.03 in the past few years, fluctuating with oil prices generally.
As a royalty trust, MVO Oil will lose value over time with the present value of MV Partners' remaining oil reserves, but the Trust is not scheduled to dissolve until 2026. With oil currently selling at around $90 a barrel, and given the stock's attractive yield, shares could rise significantly from their current level. This potential, topped with a generous dividend, make the stock appealing to both value and income investors.
When Transocean Ltd. (RIG) moved its headquarters to Zug, Switzerland in 2008, it was able to lower its corporate tax rate from 35% in the United States to 16%. The company owns one of the largest deep water drilling fleets in the world. Its current dividend yield is 6.8% based on its recent closing price around $47 per share -- near the bottom of its 52-week range of $38.21 - $85.98.
Transocean owned the nine-year old Deepwater Horizon drilling rig, which blew up in September of 2007, spewing 4.9 billion barrels of oil a day into the Gulf of Mexico and killing 11 crew members. In January of 2012 a Louisiana court ruled that Transocean's contract with British Petroleum shielded it from compensatory claims from the spill, but noted that the company would be subject to pollution fines levied under the Clean Water Act, plus its share of any punitive damages. The stock price of Transocean has dropped more than 40% since the Deepwater Horizon incident.
Adding to the controversy over the company's finances, Transocean recently bid $1.43 billion for Aker Drilling of Norway as part of its efforts to expand its fleet, and said it would assume $800 of Akers debt. The offering price was 62% higher than Aker's average share price 30 days prior to the offer. Adding to the negatives, in November Transocean announced the issuance of up to 30 million new shares, pushing their value below post 2010 lows. While high energy prices are bringing profits for its competitors, Transocean shares have been sinking as the company posts losses and debt downgrades in a booming market. Shares may be selling at bargain prices, but not all bargains are what they seem to be.
A chart of Ferrellgas Partners LP's (FGP) quarterly dividend over the past several years would be a flat line at $0.50 per share -- music to retired ears seeking dependable income, but discordant for growth-oriented investors. Unfortunately, Ferrellgas' profits shrank in 2009 and 2010, followed by a $43 million loss in 2011, so a disruption in the even flow of income may be on its way. The value of Ferrellgas shares has also dropped to $17 a share, near the bottom of their 52-week range of $16.86 to $29.00.
The annual dividend of $2 a share has given the stock an attractive 11.8% yield, but that may be in jeopardy. Higher debt levels threaten the partnership's cash cushion because its acquisition strategy is cash driven. Another aspect to consider is that Ferrellgas is a Master Limited Partnership, or MLP -- a partnership that trades on the market like a share of common stock. Since MLPs are usually involved in energy distribution rather than production, their yield is influenced by demand rather than commodity pricing. Ferrellgas reported a loss per unit for the first quarter of 2012, possibly reflecting warmer than normal winter temperatures impacting demand growth. However, another noteworthy feature of MLPs is that the partnership is not subject to federal or state income tax. Income, gains, losses, deductions or credits flow through to investors who report them on their individual returns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.