5 Oil Plays For Portfolio Production In 2012

 |  Includes: BTE, COP, LINEQ, VNR, XOM
by: Brad Prigmore

I believe quality energy plays offering attractive and sustainable yields should be a key component in your portfolio for the remainder of 2012. The price of crude continues to hover profitably around the century mark. Rising tensions in the Middle East also threaten to drive the price even higher.

My picks include Exxon Mobil (XOM), ConocoPhilips (COP), Linn Energy (LINE), Baytex Energy (BTE), and Vanguard Natural Resources (VNR).

Exxon Mobil

The obvious first choice is aristocrat Exxon Mobil with a market cap just north of $400 billion. It has global operations and was, until recently, the worlds largest oil company in terms of production. Its price-to-earnings multiple is relatively low at just above 10 for trailing 12 month earnings. It has a price-to-earnings growth ratio of about 1.5 and return on equity is a solid 27%. It has a current dividend yield of about 2.2% annually, which represents a comfortable payout ratio of about 20%. The dividend payout has essentially doubled over the past 10 years making this a nice, conservative dividend growth candidate for the long haul. The company is also well positioned for future development of natural gas as a clean energy source.


ConocoPhillips, my next choice, also has operations across the globe. It currently lists assets of over $153 billion and annual revenue of around $60 billion. The company sports an attractive price-to-earnings ratio of around 8.5, a price-to-earnings growth ratio of 1.93, and return on equity slightly lower than Exxon Mobile at around 18%. ConocoPhilips rewards shareholders with a nice dividend payout of 3.5% annually. This represents a stable payout ratio of 29%. ConocoPhilips is also a special situation stock with added value. On July 14, 2011, ConocoPhilips announced its intent to split into two independently traded companies by the second quarter of 2012. The stated goal of this endeavor aims at increasing shareholder value by approximately $20 billion and refocusing operations to become even more competitive. The result post split will be two separate companies, ConocoPhilips and Philips 66. Shareholders will receive one new share of Philips 66 for every two shares of ConocoPhilips.

Linn Energy

Another pick is Linn Energy, an independent exploration and production master limited partnership operating primarily in the U.S. It has a market cap close to $8 billion with a price-to-earnings ratio of 16. It offers a compelling distribution yield of over 7%. It has a payout ratio of over 100%, which lends to sustainability questions. Nevertheless, I still am bullish Linn for 2012 as management has hedged oil and natural gas production at favorable prices through 2015. Assets are located in the Mid-Continent, the Permian Basin, Michigan, California, and the Williston Basin. The Mid-Continent portion includes the Texas Panhandle Deep Granite Wash formation and deep formations in Oklahoma and Kansas. They also operate shallow formations in the Texas Panhandle Brown Dolomite formation and in Oklahoma, Louisiana, and Illinois. Permian Basin includes areas in West Texas and Southeast New Mexico. On Dec. 15, 2011, the company acquired certain oil and natural gas properties located primarily in the Granite Wash of Texas and Oklahoma from Plains Exploration & Production (NYSE:PXP).

Vanguard Natural Resources

My next pick is Vanguard Natural Resources, which is another exploration and production master limited partnership. It is involved in the acquisition and development of oil and natural gas properties in locations including southern Appalachian Basin, southeast Kentucky, northeast Tennessee, the Permian Basin, and west Texas. It has a market cap of just under $1.4 billion and a price-to-earnings ratio just over 14. It has a captivating distribution rate of over 8% annually. It also faces a payout ratio dilemma. Nevertheless, Vanguard Natural Resources has consistently increased quarterly distributions, from 42.5 cents in 2008 to 58.75 cents for its fourth quarter ended December 2011. Vanguard Natural Resources distributed a total of $2.31 per unit in fiscal 2011, which was 5.7% higher than in 2010.

Baytex Energy Trust

My last pick is Baytex Energy Trust, a Canadian oil and natural gas trust based in Calgary. It has continued to exert more of a presence in the U.S. recently. It was founded in 1993 and has been involved primarily in the acquisition, exploration, development, and production of oil and natural gas in Canada. It has a market cap of around $6 billion with a price-to-earnings ratio of 27. It offers a 5% annual dividend paid monthly and has limited exposure to falling natural gas prices. Baytex's low-cost production model sets it apart from other leading firms in the industry, and should help fuel its future growth.

Disclosure: I am long XOM, COP, LINE, VNR.