Wishing I Could Restart My Energy Portfolio With These Dividend Stocks

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Includes: BP, CVE, CVX, ENB, EPD, EQNR, IMO, KMI, MMP, PTR, RDS.B, SEP, SU, TOT, TRP, XOM
by: Canadian Dividend Growth Investor
Summary

I've looked at 9 oil & gas integrated companies, including Exxon Mobil, Royal Dutch Shell, Chevron, Suncor, Imperial Oil, etc.

And I've looked at 7 midstream companies, including Kinder Morgan, Magellan Midstream Partners, Enterprise Products Partners, Enbridge, TransCanada, etc.

Which are the safest dividend stocks to average in for the long-term?

After the oil price plummet, you may be looking to invest in the top energy stocks. Thinking of buying Exxon Mobil Corporation (NYSE:XOM) after it came down 25% from its 52-week high, Chevron Corporation (NYSE:CVX) after it declined 38%, or perhaps Kinder Morgan Inc (NYSE:KMI) now that it has declined 34%? Well, among these, other common integrated oil & gas companies and midstream companies will be discussed.

Integrated oil & gas companies and the pipelines are the safer energy companies. Energy stocks such as Exxon Mobil are integrated oil & gas that are involved with upstream and downstream operations. Because their businesses are multifaceted, their businesses are more stable than energy companies involved only in upstream businesses. Upstream operations include oil & gas exploration and production, while downstream operations include refinement, marketing, and distribution of the commodities.

The pipeline businesses generate stable cash flows by transporting and storing energy. Their services are mostly fee-based so their profitability are less affected by the oil price.

I put together a list of energy stocks that are integrated oil & gas companies or pipeline companies. They all turn out to be dividend stocks which help with portfolio returns because shareholders receive income even in a down market.

However, integrated oil & gas company dividends may not be reliable because the company profitability is based on the commodity prices. As we've seen in the past year, some energy companies had to slash their dividends. Cenovus Energy Inc (NYSE:CVE) was one of them.

For the data analysis, I compared the energy stocks' trailing twelve month [TTM] earnings per share [EPS] and operating cash flows from 2014's. I'm also comparing the latest quarter's debt-to-equity [D/E] to 2014's. I will also include the D/E ratio. The above is checking the stocks' profitability and debt levels in this low oil price environment.

The integrated oil and gas stock list includes Exxon Mobil, Royal Dutch Shell plc (NYSE:RDS.B), Chevron, BP (NYSE:BP), PetroChina (NYSE:PTR), Total SA (NYSE:TOT), Statoil ASA(ADR) (STO), Imperial Oil Limited (NYSEMKT:IMO), and Suncor Energy (NYSE:SU).

The oil and gas midstream list includes Kinder Morgan , Enterprise Products Partners L.P. (NYSE:EPD), Spectra Energy Corp. (NYSE:SE), Spectra Energy Partners, LP (NYSE:SEP), Magellan Midstream Partners, L.P. (NYSE:MMP), Enbridge Inc (NYSE:ENB), and TransCanada Corporation (NYSE:TRP).

Without further ado, let's explore the integrated oil & gas energy stocks to see which one you might want to own for the long-term.

Which Integrated Oil and Gas Companies are the Safest Long-term Investments?

Referring to Table 1 further down the page, 4 out of 9 companies are maintaining operating margins above 10%, including Exxon Mobil, Chevron, Suncor, and Imperial Oil. Of the 4, Suncor has the highest operating margin. Amongst all the companies, BP has the worst operating margin of -4%.

Statoil has the highest D/E, followed by a tie by Total and BP. Exxon has the lowest D/E, followed by Chevron.

Imperial Oil has had the biggest reduction in operating cash flow, followed by BP, Chevron, and Royal Dutch. Total and PetroChina has had the least reduction.

Imperial Oil and Exxon Mobil maintain the strongest balance sheets, followed by Chevron.

Exxon Mobil has increased dividends for 33 years in a row. In the low oil price environment, its payout ratio is now around 52%, the highest it has been in a decade. At least it managed to increase its dividend by 5.8% in Q2 2015.

Exxon's peer, Chevron has increased dividends for 27 years in a row. In the low oil price environment, its payout ratio is now around 66%, also the highest it has been in a decade. Chevron hasn't managed to increase dividends this year, which is probably better for the financial health of the company. Its quarterly dividend has stayed the same for 6 quarters so far.

From its negative earnings, big reduction in operating cash flow, negative operating margin, and increased debt levels, looking back, BP probably shouldn't have increased its dividend in Q4 2014, when it hiked it by 1.7%.

Suncor has a track record of increasing dividends. It has hiked dividends for 13 consecutive years. Further, Suncor Energy is keeping operating cost low. In the first half of 2015, its operating cost per barrel was only C$28.20. The oil price has remained above that, so that's how the company remains profitable in this low oil price environment. Suncor Energy's 5-year compounded annual growth rate for its dividend is over 20%, although its most recent dividend increase was only 3.6% to reflect the impact of the low oil price.

Imperial Oil is also a buy possibility as it maintains a relatively high operating margin of 10.5%. Coincidentally, that percentage is close to its 2009 low levels of 10.3%. Imperial Oil has impressively increased dividends for 20 years, although its dividend growth rate has been around 6% per year. However, it only yields 1.4% even after a pullback of over 23% from its 52-week high. Compared to others such as Exxon Mobil, which also has a S&P credit rating of AAA, Imperial Oil's dividend doesn't look as attractive.

If I were to buy an integrated oil and gas company today, I would probably go with a combination of Exxon Mobil, Chevron, and Suncor Energy. They have relatively high operating margins and low debt levels that can only help them in the low oil price environment.

Integrated Oil and Gas Stocks: Profitability and Debt Comparison

Company

1Market Cap

1Yield

S&P Credit Ratings

2EPS change

2Op CFL change

2TTM Op Margin

3D/E change

4D/E

Exxon

$303.3B

4%

AAA

-26.1%

-18.9%

10.7%

+57%

0.11

Royal Dutch

$152.7B

7.9%

AA-

-10.2%

-21%

6.8%

+18.2%

0.26

Chevron

$145.4B

5.6%

AA

-36%

-21.5%

10.5%

+18.8%

0.19

BP

$92.3B

8%

A

-269%

-24.3%

-4%

+9.8%

0.45

PetroChina

$232.9B

3.6%

-

-40%

-6.3%

5.7%

-3.2%

0.30

Total

$107.8B

6.3%

AA-

-19.9%

-5.8%

1.9%

-10%

0.45

Statoil

$46.7B

6.6%

AA-

-279%

-19.8%

5.7%

+27.8%

0.69

Suncor

$49.3B

3.4%

A-

-47.8%

-15%

13.1%

+6.7%

0.32

Imperial Oil

$35.2B

1.4%

AAA

-43.1%

-32.4%

10.5%

+18.2%

0.26

Table 1: Integrated Oil and Gas Stocks Profitability and Debt Comparison

1 As of close of September 23, 2015

2 EPS change, Operating Cash Flow change, and Debt-to-Equity change derived from Morningstar data on close of September 23, 2015

3 Latest quarter D/E compared to 2014's

4 Latest quarter D/E

Which Pipeline Companies are the Safest Long-term Investments??

Referring to Table 2 below, 4 out of 7 has had meaningful positive operating cash flow changes, including Kinder Morgan, Spectra Energy, Spectra Energy Partners, and Enbridge. At the same time, one maybe surprised by Enbridge's slash in EPS and huge growth in operating cash flow. That's probably due to its dropdown of its assets to Enbridge Income Fund (TSX:ENF). This allows Enbridge to fund growth projects and to increase cash flows that help support Enbridge's dividend growth of 8-11% until 2018. So, it's not fair to compare Enbridge's EPS and operating cash flow numbers to its peers.

Both Enbridge and TransCanada has consistently increased dividends for over a decade. Enbridge has increased dividends for 19 years in a row, and TransCanada has increased dividends for 14 years in a row. If you're looking for consistent dividend growth, they're your best bet.

Enterprise Products Partners has increased dividends for 18 years in a row, and it has been increasing it at a compounded annual growth rate of around 6% a year in the past decade.

Magellan Midstream Partners has been even more amazing. It has increased dividends for 15 years in a row. And it has been increasing it at an increasing double-digit CAGR. For instance, its 10-year dividend growth rate is 11.3%, while its 1-year dividend growth rate is 19.4%.

Since midstream companies put an emphasis on cash flows instead of earnings per share, Enbridge seems to be the most promising. At the same time, Enbridge has the highest D/E which may scare off some investors. However, it seems to consistently spur growth, especially compared to its Canadian peer, TransCanada.

Source: Google Finance at close of September 23, 2015

Looking at the graph above, the best performer has been Magellan Midstream Partners, followed by Enterprise Products Partners, and Spectra Energy Partners, although I'd like to point out Kinder Morgan's data only begins in early 2011 and is not a fair comparison.

For U.S. citizens, the master limited partnership distributions are not taxed like dividends in a taxable account. Instead, the distributions reduce the cost basis of the investment, and so, is tax-deferred until the units are sold.

Comparing the biggest Canadian pipeline companies of Enbridge and TransCanada, Enbridge's growth reflects in its share price. In the same period, Enbridge's share price appreciated 155% while TransCanada's share price appreciated by 27%. However, at the same time, Enbridge is heavier in debt.

Pipeline Stocks: Profitability and Debt Comparison

Company

1Market Cap

1Yield

S&P Credit Ratings

2EPS change

2Op CFL change

3D/E Change

4D/E

Kinder Morgan

$66B

6.7%

BBB-

-20.2%

+7.5%

0%

1.18

Enterprise Products Partners

$53.2B

5.9%

BBB+

-11.6%

+0.7%

-1.9%

1.04

Spectra Energy

$18.8B

5.4%

BBB

-26%

+11.1%

+7.7%

1.68

Spectra Energy Partners

$12.9B

5.9%

BBB

+11.6%

+9.6%

+10.4%

0.53

Magellan Midstream Partners

$14.4B

4.8%

BBB+

-3.5%

-5.6%

+9.4%

1.75

Enbridge

$44.3B

3.6%

BBB+

-82.5%

+67.3%

-1%

3.22

TransCanada

$31B

4.8%

A-

-1.6%

-5.4%

+11.2%

1.59

Table 2: Pipeline Stocks: Profitability and Debt Comparison

1 As of close of September 23, 2015

2 EPS change, Operating Cash Flow change, and Debt-to-Equity Change derived from Morningstar data on close of September 23, 2015

3 Latest quarter D/E compared to 2014's

4 Latest quarter D/E

In Conclusion

From the integrated oil & gas stocks, I've picked Suncor Energy as one of the winners. It has low cost of operations, high operating margins, as well as a culture to increase dividends. Exxon Mobil and Chevron were my other choices as they have relatively high operating margins and low debt levels that can only benefit them in the low oil price environment.

From the pipelines, for U.S. citizens, Magellan Midstream Partners, Enterprise Products Partners, and Spectra Energy Partners seem to be good choices if you're looking for tax-deferred income in a taxable account and don't mind keeping track of the cost basis.

With the gloomy picture painted by the prolonged low oil price, these energy stocks aren't likely to rise in the coming year. So, don't put your life savings in them just yet. Rather, I'm an advocate of dollar-cost averaging into quality companies over time. Simultaneously, it's essential to maintain a diversified portfolio of stocks that aren't correlated to each other.

It could take several years for energy demand to catch up to the excess oil supply. So maybe every quarter or so, investors could opt to add money in this space if they believe in the long-term demand of oil.

  • Are you adding to any energy stocks today?

  • Or are you still patiently waiting for the right entry point?

  • If you are, buying, I'm curious what you are buying.

  • If you're waiting, I'm curious to know what indicators or prerequisites you're waiting for.

  • What are the metrics that you most care about for the oil & gas integrated companies?

  • What are the metrics that you most care about for the midstream companies?

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Disclosure: I am/we are long BP,CVE,CVX,ENB,SU,XOM,TRP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm not a certified financial advisor, and this article is not advising to buy or sell any security. This article should only be used as initial research.