Drilling For Dividends: 4 Oil Stocks Yielding Up To 9%

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Includes: ESV, LINEQ, RIG, SDRL
by: Hawkinvest

The market has started to pull back a little from recent highs and many oil and energy stocks have seen even sharper declines. This has created what might be a short window of opportunity to buy stocks in this sector. The market has been getting more volatile and many problems loom for the global economy. Because of this, it makes sense to focus on oil and energy stocks that pay a solid dividend. For the past year or so, dividend stocks have shown relative strength when markets have faced corrections. This trend is likely to continue as dividend stocks remain supported by investors seeking income. The recent pullback in some of the oil and energy stocks below could be only temporary, because the price of energy tends to rise after the first quarter. Seasonal demand for oil and other energy sources increases due to greater need for everything from fuel to air conditioning. The one big caveat is that debt problems in Europe could stall a rebound in oil and the stock market. That is why it makes sense to own stocks that will pay solid dividends, because at least you will get paid, while waiting for higher prices. Here are a few stocks that have pulled-back recently, but still offer income and rebound potential:

Transocean (NYSE:RIG) shares were trading around $58 per share in March, but the stock has dropped by about $10 per share in the first weeks of April. When Transocean shares have declined in the recent past, it was often due to company-specific issues which included a secondary offering, and liability issues related to the oil spill in the Gulf of Mexico. However, the recent decline seems to be related to the drop in oil and the stock market. This could mean that Transocean shares are poised to resume an uptrend, when oil and the markets cooperate. This company is likely to benefit from the long-term demand increase for offshore drilling. As the global population expands, and as emerging market countries consume more energy, the need to drill offshore will grow. Transocean has a fleet of about 138 offshore rigs that it either owns or operates that can handle this demand. This company still faces challenges, so it makes sense to keep the size of a position at reasonable levels and average into the shares over time. The stock appears to offer value at about 10 times forward earnings, and it provides a generous dividend that yields 6.5%.

Here are some key points for RIG:

  • Current share price: $50.29
  • The 52 week range is $38.21 to $74.96
  • Earnings estimates for 2012: $2.94 per share
  • Earnings estimates for 2013: $5.02 per share
  • Annual dividend: $3.16 per share which yields 6.5%

Ensco PLC (NYSE:ESV) is poised to benefit from demand growth in offshore drilling as it operates a fleet of 42 jackup rigs, 4 ultra-deepwater semi-submersible rigs,

and a barge rig. This company appears to be less controversial when compared to Transocean, so more conservative investors should consider this stock as a top pick for the sector. Ensco recently announced a 5-year deal with BP (NYSE:BP) for which it will be paid about $522,000 per day, for a drillship that is expected to be in service later this year. Ensco has one of the youngest fleets in the industry and that means the risk of equipment failure and maintenance expenses present a lower risk, when compared to many other companies that have older equipment. Ensco shares climbed to around $60 in late-February, but have since been trending lower in spite of the good news. Ensco has a solid balance sheet, an above-average dividend, and it trades for just about 10 times 2012 earnings, and around 8 times estimates for 2013. This stock looks cheap enough to start buying now, and more on any further market corrections.

Here are some key points for ESV:

  • Current share price: $52.95
  • The 52 week range is $37.39 to $60.31
  • Earnings estimates for 2012: $5.38 per share
  • Earnings estimates for 2013: $6.77 per share
  • Annual dividend: $1.50 per share which yields 2.9%

Seadrill Limited (NYSE:SDRL) provides a very generous dividend to investors. At nearly 9%, it's one of the highest dividends in the oil sector, and that's why it makes sense to consider this stock in market corrections. Seadrill provides offshore drilling services to oil and gas companies with a fleet of 63 units which include drillships,

jack-up rigs, semi-submersible rigs and tender rigs, etc. Just weeks ago, this stock was trading near $42 per share, but it has declined in the past few trading sessions. Seadrill also has a relatively young fleet which means equipment maintenance and downtime expenses should be minimal. It pays out much of its earnings with the dividend and the company is likely to continue doing so. The company website states:

Our primary objective is to profitably grow our business to increase long-term distributable cash flow per share to our shareholders.

Seadrill shares offer solid value at current levels, but in the event of a market correction, $34 would be an even better entry point. The stock appears to have support at the $34 level, as that is near the 200-day moving average.

Here are some key points for SDRL:

  • Current share price: $37.73
  • The 52 week range is $24.68 to $42.34
  • Earnings estimates for 2012: $3.12
  • Earnings estimates for 2013: $3.44
  • Annual dividend: $3.20 per share which yields about 9%

Linn Energy LLC (LINE) shares have been holding up relatively well, even on days when the Dow Jones Index is down triple digits. That's the kind of stability that most investors want to see when times get tough. The dividend is another very compelling factor as it currently yields over 7%. Even though the stock has been stronger than many in the oil sector, it has been possible to buy these shares on dips. Linn Energy focuses it's oil and natural gas projects and interests in the Mid-Continent, Permian Basin, Hugoton Basin, Williston Basin, and other areas. Dividend distributions have a history of rising. In 2007, the dividend was $2.07 per share, and thanks to regular increases, the annual payout now stands at $2.76 per share. Some recent dips in this stock have provided investors with a opportunity to buy this consistent dividend-payer at levels that could provide capital gains as well.

Here are some key points for LINE:

  • Current share price: $38.62
  • The 52 week range is $31.03 to $41.13
  • Earnings estimates for 2012: $1.99 per share
  • Earnings estimates for 2013: $2.28 per share
  • Annual dividend: $2.76 per share which yields 7.2%

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Data is sourced from Yahoo Finance. No guarantees or representations are made. 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.