My three keys for evaluating energy sector companies is low valuations, growing/acquiring production, and sustainable dividend/distribution yields.
Prudent investors who waited patiently for the dust to settle from the recent ConocoPhilips split have been rewarded with a lower buying price opportunity.
Before the split management vowed to reaffirm the current dividend. With prices down another 5% since the split, this makes the dividend yield now an extremely attractive 5%. This was my target yield for buying after the split and my trigger finger is getting itchy.
The fundamentals are still in tact and I think it is a great long-term buy if it touches anywhere below 50. I have a feeling income investors will be taking a chance here if the share price continues to swoon.
This company has not yielded over 5% since the liquidity crisis, although with the split it is now a different company with different assets.
In the short term, ConocoPhillips plans to repurchase $10 billion in shares in 2012. This program will be largely funded by asset sales as the company repositions itself as a streamlined E&P company.
The company also has an excellent history of dividend increases. It will likely need to rely on asset sales and cash on hand to fund its payout and capital expenditures in the short term.
Statoil remains an extremely competent company with unmatched expertise in deep offshore operations and advanced drilling techniques. They place an emphasis on safety and quality of work.
Another bright spot of this Norwegain energy company is its juicy dividend yield. Statoil pays its annual dividend once in May. Last year, the company paid a total of $1.104 to ADR holders, equivalent to an attractive yield of about 4.4% at current share prices.
Given solid production results and consistently profitable oil prices the preceding year, I'd expect the firm to boost the payout this year by around 10%.
With a dividend payout rate of only 34% and limited debt, Statoil is one of the world's best-capitalized energy companies. It's a solid buy for even the most conservative investors.
My only real concern is the tricky fact that Statoil is basically a partially government-owned oil company, like Petrobras (PBR). These types of oil companies have the potential of becoming more political than economic entities.
I do not have much of a hesitation here as the government of Norway and Brazil are two different beasts. The company owns a 50% stake and acts as operator, while Italian oil giant Eni (E) owns 30%, and Petoro, Norway's state-owned company that manages its portfolio of exploration and production, owns the final 20%.
Vanguard Natural Resources
Vanguard Natural Resources, LLC, through its subsidiaries, engages in the acquisition and development of oil and natural gas properties in the United States. They buy established reserves and work with drillers to increase production.
I continue to believe these types of energy MLP's are a good income vehicle for the environment that we are currently in as they offer solid yield and distribution growth. In addition, they are benefiting from growing domestic energy production.
VNR provides an 8.8% yield and has doubled its distribution payments since early 2008. It recently announced a higher distribution payment, its sixth straight quarter of raising its distribution payment.
In the just completed quarter, EBITDA increased 42% to $53.2 million in the first quarter of 2012 from $37.6 million in the first quarter of 2011.
The company has natural gas exposure but is well hedged. The company realized an average of $6.01 per mcf in the recently reported quarter. These types of hedges will continue at least through 2014. It is now moving more production to oil and liquid production. Oil and Liquids now make up 2/3's of its production. I believe the current sagging share price is an opportunity to buy on weakness.