Finding Safe Dividends in Beaten-Down Energy Stocks

Energy stock in

S&P 500

This year their price has almost halved. There is a possibility of dividend reductions and suspensions in the sector, as companies have sidelined the cash situation amid epidemics and weak commodity prices. This is not an ideal scenario for income investors.

And yet.

“There are a select few opportunities in the energy sector to find sustainable and attractive income,” says Devin McDermott, head of North American oil and gas research at Morgan Stanley. Baron’s.

There are energy companies paying dividends in favor of McDermott.


(Ticker: CVX) and an assortment of midstream operations, which typically focus on infrastructure, such as pipelines for the transportation of oil and gas. They include

Magellan Midstream Partners

(MMP) and

Enterprise Product Partner

(EPD), both at the time, are master-limited partnership-popular income vehicles. Those two MLPs were yielding 11.8% and 11% respectively.

McDermott also likes a dividend outlook

Williams Cos.

(WMB), whose assets include pipelines for the transportation of oil and gas. It recently achieved 7.9% yield.

“They [stocks] Says McDermott, “Everyone has quite compelling yields for flexibility through this new cycle, even having a strong balance sheet to deliver flexibility through this cycle.” ”

But investors should be cautious. S&P 500 alone among energy companies, exploration-and-production companies

A native tribe of america


Occasional petroleum

(OXY), and

Noble Energy

(NBL) has reduced its payments this year. A & E & P Firm,

Marathon oil

(MRO) suspended its dividend.

Global oil companies have not been immune to cuts either.


(BP.London) said in August that it would reduce its quarterly dividend from 10.5 cents to 5.25 cents per share. And

Royal Dutch Shell

(RDS.A) reduced its payment by about two-thirds to 16 cents per share in April.

Closing prices on September 28; Yields as of September 29

Source: FactSet

The two integrated oil companies included in the table-

Exxon Mobil

(XOM) and Chevron maintain their quarterly disbursements during the epidemic, but their underlying stories are different.

For Exxon Mobil, which is using the loan to pay its dividend, there has been much speculation about how secure the payment is. Exxon Mobil common stock is yielding 10.2%. It is down about 45% this year, including dividends.

“In a world where this is the new common commodity – for the decline in commodity prices and weak margins at its bottom [businesses]- This dividend will not last long, and eventually they will have to make a decision, ”warns McDermott.

He said that using debt to pay dividends is a long-term long-term strategy. And oil prices remain indifferent, with Brent crude slightly above $ 42 per barrel as recently as last year.

Nevertheless, Exxon has stabilized keeping in view the dividend coming. In late July, it announced a quarterly distribution of 87 cents per quarter in line with the first payment.

The company has maintained its position as S&P 500 Dividend Aristocrat, increasing its payout for 37 consecutive years, based on maintaining its dividend this year. If its payment does not increase even this year, it will remain in the group as its total payout in 2020 will be higher than the previous year’s level, assuming that there is no reduction at the end of the year.

A company spokesperson asked for comment, referenced Baron’s Comment by senior vice president Neil Chapman during a second-quarter earnings call with analysts on July 31. Exxon Mobil said, short-term capital expenditures were cut by more than 30% and there was momentum to reduce cash operating expenses. More than 15%.

“A large part of our shareholder base has come to see dividends as a source of stability in their income, and we take this very seriously,” Chapman said. “Our plan includes further reductions in operating expenses to maintain our debt at current levels and our dividends.”

Wells Fargo Securities analysts Roger Reid and Lauren Hendrix expressed optimism in a recent research note that the company could maintain its payments. “Unlike some, we believe [Exxon Mobil] Can maintain its current dividend payment through 2023, another oil price has collapsed, “Read and Hendrix wrote to restore trust” [Exxon Mobil] Real strategic changes must be pursued and go beyond short-term capex cuts. “

Chevron, meanwhile, gives 7.2% – higher yield, but not to the level that investors are doubting its ability to pay dividends.

“In the current $ 40 oil world, the dividend is covered looking forward, and the balance sheet is in excellent shape,” McDermott says. “Of all the global oil majors, Chevron has the best balance sheet and lowest leverage, and this gives them additional flexibility through this period of uncertainty.”

In contrast, McDermott calculates that Exxon Mobil will require an average Brent price of $ 60 per barrel over the next five years to cover its dividend. Unlike Chevron, Exxon Mobil was more aggressive in increasing its capital spending “to position itself better than peers in commodity recovery,” McDermott says.

To find out about its need for belt-tightening, Exxon Mobil is now on pace for nearly $ 19 billion in capital spending, down from $ 30 billion to $ 35 billion in previous years, McDermott observes.

“The company is doing the right thing. They say what is under their control, but unfortunately this commodity price environment is beyond their control.

And income is a wild card for investors: Even the most stalwart and disciplined dividend payers in the energy patch can commit to their payments, but the epidemic may have other plans.

Write Lawrence C. In Strauss Lawrence. [email protected]


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