Seven Dividend-paying Oil Investments to Purchase During a Market Correction and Russian Saber-Rattling
By: Paul Dykewicz,
Seven dividend-paying oil investments to purchase during a market correction and Russian saber-rattling provide a path to profit powerfully this year.
The new year is starting what appears to be a rebound in the energy sector led by an increase in demand as the COVID-19 crisis appears to be peaking, according to a recent analysis by BofA Global Research. Four of the seven dividend-paying oil investments to purchase during a market correction feature U.S. oil companies that seem substantially undervalued, BofA opined.
In addition, environmental, social and governance (ESG) issues have been causing many individual and institutional investors to favor stocks that offer clean energy, social consciousness and leadership, executive pay and shareholder rights. Traditional oil stocks face big challenges to satisfy the ESG standards of certain investors who are shunning those stocks due to non-financial factors.
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Seven Dividend-paying Oil Investments to Purchase During a Market Correction and Russian Threats Against Ukraine
The reluctance of certain investors to purchase oil stocks has led to a drop in their share prices, compared to their worth based on traditional financial metrics. BofA explained “old energy” stocks have lost appeal versus clean energy equities. Nonetheless, many traditional oil stocks are boosting their free cash flow rather than focusing on growth as they may have done in the past.
“With what we see emerging as a reasonable long-term oil range of $60-80, we believe the sector can regain a 5% S&P 500 weight, positioning ‘old energy’ as relevant again in the eyes of investors,” BofA wrote.
As a result, the investment firm’s strategists are overweight in energy stocks. Oil prices recently climbed past $85/bbl., with WTI Crude closing Jan. 28 at $86.82 and Brent Crude topping $90 to reach $90.54.
“Energy is the poster child for inflation protected yield, with the highest free cash flow yield and highest inflation beta of all sectors,” BofA commented.
Russia President Vladimir Putin’s decision to send an estimated 130,000 troops to the border of Ukraine has raised concerns of in the West of a potential attack and triggered a rise in oil futures to their highest levels in more than seven years. If Russia invades Ukraine, as it did with that country’s Crimea region in 2014, oil prices could spike further.
NATO recently took steps to deter Russian aggression in the Baltic Sea region with President Biden ordering 8,500 troops to heightened alert for potential deployment to Central and Eastern Europe. Western nations also have sent planeloads of weapons to help support drastically outnumbered and out gunned Ukraine defenses.
Seven Dividend-paying Oil Investments to Purchase During a Market Correction and Saudi Effect
The favorable outlook for oil is strengthened by the idea that if Saudi Arabia is not challenged for market share, it has “de-facto control” of pricing the commodity. BoA’ cited 1998, when Saudi Arabia las exploited a demand crisis to its advantage.
In a post-COVID-19 world, BoA counseled that Saudi/Russian self-described “regulatory” actions to contain price volatility offer implicit support for the long-dated oil outlook.
“Our approach to valuation is different by design — defined by sustainable free cash, at a market-based cost of capital,” BofA wrote. The result could be “unprecedented” capacity to return cash to investors, with average sector free cash flow yield of 20% in 2022, the investment firm wrote.
ExxonMobil Leads Seven Dividend-paying Oil Investments to Purchase During a Market Correction
Exxon Mobil Corporation (NYSE: XOM), a multinational oil and gas company based in Irving, Texas, received a $100 price objective from BofA. Among the major oil companies, XOM ranks as the investment firm’s top pick.
The company’s management seems committed to returning cash instead of deleveraging, BofA wrote. With initial debt targets likely achieved in early 2022, a return to a competitive dividend could produce a 5x increase and still leave $3.5 billion of free cash, or 15% of its current market value, available for a share buyback, the investment firm added.
“Having navigated the collapse in oil prices with its dividend intact, XOM is the only major [oil company] to emerge with a long list of organic growth opportunities poised for an inflection in free cash flow,” BofA wrote.
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The top holding in the Energy Select SPDR (XLE) exchange-traded fund is Exxon Mobil, said Bob Carlson, who leads the Retirement Watch investment newsletter. Carlson, who also serves as a pension fund chairman, added that energy stocks had a strong finish to 2021, and most of the reasons for those gains continue in 2022.
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Plus, inflation is likely to remain high for much of this year and perhaps longer, Carlson continued. Energy stocks traditionally are a good inflation hedge, he added. Carlson is recommending XLE.
Pension and Retirement Watch chief Bob Carlson takes questions from Paul Dykewicz.
Jim Woods, who leads investment advisory services, personally is recommending Exxon Mobil in the Income Multipliers portfolio of his Intelligence Report investment newsletter. Woods, who also heads the Successful Investing investment newsletter, as well as the Bullseye Stock Trader and High Velocity Options advisory services, produced a 56.9% return on his recommendation of XOM to his Intelligence Report subscribers in 2021.
Jim Woods and Paul Dykewicz discuss stocks to buy.
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Seven Dividend-paying Oil Investments to Purchase During a Market Correction Include Chevron
Chevron Corp. (NYSE: CVX), a San Ramon, California-based multinational energy corporation, operates in more than 180 countries and is a buy recommendation of BofA. The investment firm’s $150 per share price objective, up from $140 per share previously, assumes an average of $60 Brent / $56.50 WTI.
BofA identified three key risks to the oil company achieving its price target. They are: (1) commodity price volatility, (2) operational execution, particularly on new projects, and (3) inability to capture the price environment due to cost pressures such as operating expenses, capital expenditures and taxation.
On the other hand, Chevron could top the investment firm’s price target, depending on other factors. The biggest two reasons for an outperformance likely would come from higher-than-expected oil prices and lower-than-projected capital expenditure spending, BofA added.
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Suncor Joins Seven Dividend-paying Oil Investments to Purchase During a Market Correction
Suncor Energy Inc. (NYSE: SU), an integrated energy company based in Calgary, Alberta, specializes in production of synthetic crude from oil sands. SU received a buy recommendation from BofA and price objective of $34.
With a robust free cash flow outlook underpinned by a roll-off in major project spending and a sector low break-even of $35/bbl. WTI post-dividend, the oil company’s dividend coverage is expected to remain higher than its “big oil” peers. That situation sets the stage for leading cash return growth along with its dividend yield in the 5% range.
BofA recently reinstated coverage of Suncor with a buy recommendation. The investment firm now views Canada as advantaged compared to the U.S. exploration and production (E&P) businesses, marking a significant shift from perceptions just a few years ago, BofA wrote.
“In our view, capital discipline and a necessary pivot to cash returns over perpetual spending on unnecessary growth has leveled the playing field for what was previously seen as a short cycle ‘advantage’ for U.S. E&Ps versus the relatively stagnant production profile of oil sands,” BofA wrote. “Within our valuation framework, which defines value as a function of sustainable free cash flow, we see the relative advantage tipping towards Canada with capital efficiency helped by significant, legacy sunk costs and low sustaining capital.”
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Occidental Joins Seven Dividend-paying Oil Investments to Purchase During a Market Correction
Houston-based Occidental Petroleum Corp. (NYSE: OXY) is engaged in hydrocarbon exploration in the United States, the Middle East and Colombia, as well as petrochemical manufacturing in the United States, Canada and Chile. The stock received a $52 price objective from BofA Global Research, assuming the average of the base case of $60 Brent / $56.50 WTI.
Potential risks to OXY attaining its price objective are (1) the oil and gas price and margin environment, (2) significant delays to the new upstream projects critical to its production targets and (3) not seizing the price environment due to cost pressures of operating expenses, capital expenditures and taxation. On the other hand, the price target might be beaten due to higher oil and gas prices than now forecast.
OXY stands out for having one of the best free cash flows in the sector, BofA wrote.
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Hess Lands Among Seven Dividend-paying Oil Investments to Purchase During a Market Correction
Hess Corp. (NYSE: HES), a New York-based independent energy company engaged in the exploration and production of crude oil, obtained a $131 price objective and a buy rating from BofA. A new boost could come from the company’s position in Guyana emerging as transformational for a business the size of Hess, BofA added.
With Liza Phase 2 in Guyana, the asset becomes self-funding and leading to a free cash flow inflection in share that will continue to expand with subsequent phases, BofA wrote. The stock remains undervalued at current levels, the investment firm continued.
BofA’s $131 price objective assumes oil prices of $60 Brent / $56.50 WTI. Risks to achieving the price objective are (1) the oil and gas price and margin environment, (2) significant delays to the new upstream projects critical to its growth targets, (3) inability to capture the price environment due to cost pressures and (4) negative news flow around the company’s exploratory and appraisal drilling activities.
Outperformance could occur if Hess is helped by higher oil and gas prices than forecast. Plus, after five years of talk, Guyana now will become operational for Hess, BofA wrote.
Expect short-term debt paid this year, the first dividend increase by Hess in eight years, and “opportunistic” share buy backs, BofA wrote.
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COVID-19 Deaths Keep Concerns High
Maryland is the latest example of a state that is enduring record high deaths from COVID-19, as state health officials reported the most deaths from the virus in January 2022, compared to any other month of the pandemic, data show. More than 1,500 people in Maryland are expected to die from COVID-19 in January, topping the previous monthly record 1,364 deaths in May 2021.
The Centers for Disease Control and Prevention (CDC) reported that the continuing threat of COVID-19 is spurring people to obtain boosters. However, more than 60 million people in the United States, or nearly 15%, remain eligible for vaccinations but have failed to obtain them, said Dr. Anthony Fauci, the chief White House medical adviser on COVID-19.
As of Jan. 28, roughly 250 million people, or slightly more than 75% of the U.S. population, have received at least one dose of a COVID-19 vaccine, the CDC reported. Those who are fully vaccinated total 211,343,818, or 63.7% of the U.S. population, according to the CDC.
COVID-19 deaths worldwide, as of Jan. 28, topped the 5.6 million mark to hit 5,646,990, according to Johns Hopkins University. Worldwide COVID-19 cases have add more than 11 million cases in the past few days to top 369 million, reaching 369,030,505.
U.S. COVID-19 cases, as of Jan. 28, topped 73 million, totaling 73,880,470 and causing 881,642 deaths. America has the dubious distinction as the country with the most COVID-19 cases and deaths.
The seven dividend-paying oil investments to purchase amid a market correction give investors a path to profit from the rising prices of black gold per barrel. People who can withstand the risk of contrarian investing, compared to the following the trail of ESG-focused investors, could find their returns fueled by focusing on traditional financial fundamentals such as free cash flow.
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Paul Dykewicz
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Paul Dykewicz, www.pauldykewicz.com, is a respected, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other investment reports.
Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. In addition, Paul serves as a commentator about investing, economics, business news, politics and motivational guidance.
Paul earned a master’s degree in business administration with a focus on finance at Baltimore’s Johns Hopkins University, where he was elected to two terms as president of its Finance Club. He earlier received a master’s degree from Michigan State University’s School of Journalism, where he was inducted into the Kappa Tau Alpha honor society. Paul received a bachelor’s degree from the University of Michigan in Ann Arbor, focusing on political science, business and economics.
