Oil prices have rebounded from their April lows, but most stocks in the oil-and-gas industry remain subdued.
Still, the best-managed companies often offer strong dividends, at a time when Treasuries and other “risk-free” assets don’t offer much income.
We screened for energy companies that boast dividend yields of more than 3% and have a manageable amount of debt—total debt that is less than half of their overall capital, and operating income in the latest quarter that covers their interest payments by at least four times. Only three companies made the grade, but they are worth considering at a time when most oil-and-gas companies are just trying to stay afloat in a difficult market.
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Oil producers that conserve capital can be good dividend plays, and some are trading at discounted valuations that could be good entry points for investors.
Oil Dividends
Three oil and gas companies pay decent dividends while keeping their debt in check
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Chevron (ticker: CVX) tops the list. The oil major came into the pandemic with one of the best balance sheets in the business, after spending less heavily than most rivals on production in the past few years. That strong balance sheet has given Chevron flexibility. Chevron just bought Noble Energy (NBL), an oil and gas producer with wide holdings in the U.S. and overseas. And analysts say it should have little trouble paying its dividend in the years ahead, even if oil prices remain relatively low. Its stock has a dividend yield of 5.7%.
Midland, Texas producer Diamondback Energy (FANG) has also paid close attention to its balance sheet, and came into the pandemic with considerable strength. Diamondback has curtailed oil and gas production, but expects production to bottom in the third quarter before rebounding in the fourth.
Even at reduced production levels, Diamondback expects to “generate significant free cash flow in the second half of 2020 and into 2021 at current commodity prices,” said Travis Stice, CEO of Diamondback, in a statement. “Under a maintenance capital scenario in 2021, Diamondback can hold fourth quarter 2020 oil production flat while spending 25% - 35% less capital than 2020. Our long-term capital allocation philosophy and Diamondback’s value proposition remain unchanged: protect and grow our dividend as our primary return of capital, protect our balance sheet, and drill, complete and produce barrels with the highest margins at the lowest capital and operating costs in the industry.”
EOG Resources (EOG) is a Houston-based independent oil-and-gas producer with a strong balance sheet. It also curtailed activity as prices fell, and is in good shape to conserve cash for its dividend and other priorities. “EOG slowed activity more than nearly any operator last quarter as prices fell,” wrote SunTrust Robinson Humphrey analyst Neal Dingmann. He rates the stock at Buy.
Write to Avi Salzman at avi.salzman@barrons.com
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July 29, 2020 at 05:00PM
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3 Oil Stocks With Healthy-Looking Dividends - Barron's
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