Oil To $100? Play The Rally More Cautiously With These 2 Income Stocks
Investing.com | Sep 27, 2018 01:45
It is a truth universally acknowledged that nobody knows where oil prices will head next. Take the current bullish trend. After the US recently re-imposed sanctions on Iran over its nuclear program, there have been forecasts for oil returning to $100 for the first time since 2014.
But there are many risks to that bullish forecast. Oil prices might tumble if President Donald Trump, who has been pressuring OPEC to stop this surge, decides to tap the US Strategic Petroleum Reserve.
Another threat to $100-dollar-oil scenario is an escalating trade war between the US and China. The ongoing tiff might hurt demand if China, the second-largest consumer of oil, goes through a major economic slowdown.
Luckily there are other ways to play the strength of oil. It’s much easier to analyze the companies that buy and sell commodities than trade the commodity itself. From their balance sheets and income statements, you can make an educated guess as to what might happen to their profitability if oil prices continue to soar, or if they fall.
Chevron (NYSE:CVX) and Suncor Energy (NYSE:SU) both pay regular dividends and are good bets if you believe that oil is on its way to $100.
h3 Chevron: Safe Dividend, Even At $50 Oil/h3A US oil supermajor, Chevron is a great stock with which to earn growing dividends with decent capital gains. Chevron is the second-largest global oil producer behind Exxon Mobil (NYSE:XOM), with a $236 billion market capitalization. It is an integrated energy company with a separate chemical business, operating both upstream and downstream.
Chevron’s biggest strength is its diversified business model, which is a hedge against falling oil prices. Even if the company loses money on production of oil and gas, its refining and marketing of energy products and manufacturing of commodity petrochemicals can still generate cash and mitigate the impact of an oil slump.
Chevron is currently focusing on returning cash to investors instead of pursuing massive growth, unlike its rival Exxon. Chevron CEO Michael Wirth told the Financial Times in mid-2018 that he wants the company to be able to cover its dividend with free cash flow at $50 oil.
In its second-quarter earnings report, Chevron announced its plan to return $3 billion to investors in share buybacks. CFO Pat Yarrington told analysts in July that the buyback isn’t a one-off and could be added to in the future. Chevron plans to repurchase $25 billion of its shares in total. The company currently pays a $4.48 per share annual dividend, which amounts to a 3.63% yield at Chevron's current share price of $121.95 as of yesterday's close. The company's dividend has nearly doubled during the past decade.
h3 Suncor: Diversification Showcased/h3
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Calgary-based Suncor Energy is one of the largest oil sands producers in Canada. Just like Chevron, Suncor also has a diversified asset base that includes large oil fields, gas stations and wind farms.
The company holds the largest reserves in the oil sands and it owns and operates four refineries, Canada’s largest ethanol plant, wind farms and 1,500 retail outlets.
That means it’s not fully exposed to oil markets and its integrated business in the energy supply chain can produce hefty cash flows, even if oil prices remain depressed for an extended period of time.
The other main attraction of buying Suncor is that the producer is a solid income stock. Suncor has a long history of rewarding investors with growing dividends. This year, Suncor hiked its quarterly dividend by 12.5% to $0.36 per share, marking the 16th year of consecutive annualized dividend hikes.
Suncor is well positioned to benefit if oil prices continue to surge. Suncor recently generated its strongest second-quarter cash flow on record, with funds from operations of $2.9 billion and operating earnings of $1.2 billion.
Bottom Line
If you’re a long-term income investor, buying a couple of solid oil stocks that pay regular dividends isn’t a bad idea. Companies such as Chevron and Suncor are not only positioned to deliver hefty capital gains if oil prices continue to surge, but they're also reliable income stocks. As well, their growing dividends reduce the impact of any prolonged downturn in oil markets.
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