3 Oil Stocks to Buy With Market-Beating Dividends
These names are attractive for investors because of their steady dividend increases along with high yields.
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Oil prices are at multi-year lows, with WTI crude prices back at $72 per barrel in the United States. However, with the ongoing war in Ukraine and persistent inflation, there is the possibility that 2024 will bring higher oil prices.
The following oil stocks are attractive for dividend investors because of their steady dividend increases along with high dividend yields as well.
Oil Stock #1
Kinder Morgan KMI is among the largest energy companies in the U.S. It is engaged in storage and transportation of oil and gas, and other products. The company owns an interest in or operates approximately 83,000 miles of pipelines and 144 terminals. Its pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and more.
Kinder Morgan's transportation assets operate like a toll road, whereby the company receives a fee for its services, which generally avoids commodity price risk. Approximately 90% of Kinder Morgan's cash flow is fee-based.
On October 18, Kinder Morgan reported its Q3 2023 results. Distributable Cash Flow (DCF) was $1,094 million, slightly less than the $1,122 million in the same period of the previous year. Adjusted earnings for the quarter were $562 million, compared to $575 million in Q3 2022. The company's net Debt-to-Adjusted EBITDA ratio remained at 4.1, aligning with its year-end goal.
In the first nine months of 2023, the company's net income attributable to KMI was $1,797 million, a drop from $1,878 million in the comparable period in 2022. The DCF also decreased by 6% from $3,753 million to $3,544 million in the same period.
There was strong demand for KMI's natural gas transportation and storage services, with expectations of natural gas demand growing by more than 20% through 2028. Kinder Morgan's biggest growth catalysts for the future are new pipeline and terminals projects. Natural gas is a compelling growth catalyst and continued to drive growth in the first half of this year. Natural gas is rapidly replacing coal, which gives Kinder Morgan a major advantage.
KMI currently yields 6.4%.
Oil Stock #2
EOG Resources EOG is a crude oil and natural gas company headquartered in Houston, Texas. Founded in 1999, EOG was incorporated as a Delaware corporation after it separated from Enron.
EOG is principally engaged in the exploration, development, and production of crude oil and natural gas with reserves in the United States, Canada, Trinidad, and China. It has three operating segments split by geographical areas: Crude oil, Natural Gas, and Natural Gas Liquids (NGL). Crude oil is the largest segment which accounts for 79% of revenue.
EOG released third-quarter results on November 2. The company enjoyed another strong quarter, with adjusted net income totaling $2.0 billion or $3.44 per share. In addition, the company repurchased 0.5 million shares for $61 million at an average price of $123 per share. The company returned over 60% of free cash flow to shareholders through dividends and special dividends and has committed to raising this to 70% in 2024.
The company has a solid dividend history with a ~27% CAGR since 2013. Due to the impressive free cash flow, EOG rewarded shareholders with another $1.50 special dividend per share on December 29. This is on top of the $5.80 special dividend announced last year. In addition, the company also increased its common dividend to $3.64/share annually. This is 10% higher than the previous level in 2023. The current dividend is covered at a $32 WTI oil price.
While the industry has had some challenging times, particularly over the last 12 years, EOG has never cut or suspended its dividend, which further cements the directors' commitment to shareholders. In addition, the payout ratio has historically been below 40%, and the company has a long-term debt of $5 billion with a total debt/equity ratio of 0.23. Combined with strong FCF growth, the dividend appears well covered.
EOG currently yields 3.3%.
Oil Stock #3
Exxon Mobil XOM is a diversified energy giant with a market capitalization above $400 billion. In 2022, the upstream segment generated 67% of total earnings while the downstream and chemical segments generated 27% and 6% of total earnings, respectively.
On October 11, Exxon agreed to acquire Pioneer Natural Resources PXD for $60 billion in an all-stock deal. As Pioneer is the largest oil producer in Permian, Exxon expects to more than double its Permian output, to 2.0 million barrels per day in 2027. As the stock of Exxon seems fully valued, we view the all-stock deal as attractive for Exxon.
In late October, Exxon reported financial results for the third quarter of 2023. Thanks to a rally in oil prices, which resulted from the latest round of production cuts of OPEC and Russia, Exxon grew its earnings per share sequentially 17%, from $1.94 to $2.27. It also raised its dividend by 4% and thus it has now raised its dividend for 41 consecutive years.
Future growth for Exxon will come from a few select projects. The company is expecting 3% annual production growth until 2025 and a much lower breakeven point thanks to the addition of exceptionally low-cost barrels. Exxon has about 10 billion barrels of oil equivalent in the Permian and expects to reach production of more than 1.0 million barrels per day in the area by 2025.
Guyana, one of the most exciting growth projects in the energy sector, is the other major growth project for Exxon. Exxon has more than tripled its estimated reserves in the area, from 3.2 billion barrels in early 2018 to about 11.0 billion barrels now.
Exxon management has stated that 90% of new reserves have a production cost of $35 per barrel and thus it views the dividend as viable at Brent prices above $45.
XOM currently yields 3.9%.
At the time of publication, Ciura had no positions in any securities mentioned.