Six Dividend-paying Energy Investments to Buy After Price Drop

Six dividend-paying energy investments to buy after a price drop during the last week have faced selling pressure since reports that the U.S. “crude tanks” incurred shrinking supplies at a major U.S. storage site.

The six dividend-paying energy investments to buy can be scooped up at reduced prices after their shares pulled back amid profit taking and reports of slipping demand after crude prices surged to $90-95, marking their highest level since August 2022. Oil supplies at a key storage hub in Cushing, Oklahoma, fell to their lowest level since July 2022, with U.S. West Texas Intermediate futures rising to $95.03 per barrel on Sept. 28, pulling back to $88.82 on Monday evening, Oct. 2, rising to $89.41 on Tuesday evening, Oct. 3, but finishing at $82.79 on Oct. 6.

The shrinking surplus at Cushing-based crude tanks, America’s largest U.S. storage hub, sent oil prices for near-term supplies surging. Stockpiles slumped below 22 million barrels recently to the lowest mark since July 2022, according to U.S. government data. The crunch even caused American crude to become pricey for Asian refiners.

Contrary to the usual negative relationship between the U.S. dollar and crude oil prices, the current oil supply shock has been “more bullish than bearish” for the American greenback in the post-pandemic environment, according to BofA Global Research. The U.S. dollar appears to be “broadly supported” until the end year’s end amid persistently tight oil supply, the investment firm wrote in a research note.

Political polls indicate most Americans agree there is an “invasion” at the southern U.S. border, a failed energy policy, a mismanaged foreign policy, an irresponsible fiscal policy and an erupting crime problem in many major cities forcing out long-time residents, seasoned Wall Street trader Bryan Perry wrote to his Cash Machine subscribers. Fortunately, the Cash Machine model portfolio has a large weighting of high-yield assets that are bullishly sensitive to rising interest rates, he added.

Paul Dykewicz interviews Cash Machine chief Bryan Perry at a MoneyShow.

Six Dividend-paying Energy Investments to Buy and Why

The six dividend-paying energy investments to buy offer both income and a chance for capital appreciation. Perry, who currently averages a dividend yield of 10.8% with Cash Machine’s 29 recommendations, closely follows and recommends oil and other energy equities. His favorite oil stock, recommended on November 29, 2022, has soared 48.26% in slightly more than 10 months.

Unemployment data released on Oct. 6 revealed non-farm payrolls for September jumped by 336,000 versus consensus estimates of 160,000. Hourly wages increased at the lowest level in a year. Even though the economy is adding jobs, wage inflation is easing. After the markets opened sharply lower in the morning of Oct. 6, the indexes later rose.

Investors also can take solace from the Personal Consumption Expenditures (PCE) index data released by the U.S. Bureau of Economic Analysis on Sept. 29 showing inflation dipping below 4% on an annual basis. When excluding volatile food and energy prices, the latest rise in the key inflation gauge of the Federal Reserve was just 0.1%, a 3.9% gain from the same period last year.

The data show that consumer prices rose less than expected during August. Growth stocks traded up after the release of the inflation news, with bond prices positive and yields dipping, Perry opined. The result is that the “trading landscape” improved a bit, he added.

Six Dividend-paying Energy Investments to Buy: Stocks and Funds

Another avid oil industry observer is Bob Carlson, a pension fund chairman who also leads the Retirement Watch investment newsletter that features several portfolios. As a risk-averse pension fund leader, Carlson often prefers funds to individual stocks to gain diversification and to reduce risk.

“For oil stocks, especially dividend-paying oil stocks, I recommend the ETF Energy Select SPDR (XLE),” Carlson advised me.

The fund owns 23 stocks and its 10 largest positions account for 74% of its holdings. Those holdings don’t change much, since XLE has a turnover ratio of only 9%, Carlson continued.

Top fund’s top positions recently consisted of Exxon Mobil (NYSE: XON), Chevron (NYSE: CVX), EOG Resources, Inc. (NYSE: EOG) Schlumberger NV (NYSE: SLB) and ConocoPhillips (NYSE: COP). XLE’s dividend yield currently is at 3.36%, while its share price is down 5.89% in the last four weeks, but up 6.10% in the past three months, 0.04% for the year to date and 9.14% in the last 12 months. The fund has 99% of its portfolio in U.S. energy companies.

Bob Carlson, leader of Retirement Watch, gives an interview to Paul Dykewicz.

Six Dividend-paying Energy Investments to Buy: IXC

Investors who want global exposure to energy stocks should consider purchasing shares in iShares Global Energy (IXC), Carlson continued. Roughly 61% of the fund is in U.S. energy companies and 39% is outside the United States.

IXC owns about 52 stocks and has 60% of the fund in the 10 largest positions. The fund’s turnover ratio is 10%.

Top holdings of IXC recently were Exxon Mobil, Chevron, Shell (NYSE: SHEL), Total Energies (NYSE: TTE) and ConocoPhilips. The dividend yield was 4.39%.

As far as performance, IXC is pulled back 4.49% in the last four weeks, but rose 8.59% in the past three months, 2.78 so far this year and 10.53% for past 12 months.

Six Dividend-paying Energy Investments to Buy: Occidental Petroleum

A dividend-paying energy stock to buy is Houston’s Occidental Petroleum (NYSE: OXY), an international energy company with assets mainly in the United States, the Middle East and North Africa. As one of the largest U.S.-based oil and gas producers, it has operations in the Permian and DJ basins, and offshore in the Gulf of Mexico.

Occidental Petroleum’s midstream and marketing segment provides flow assurance and maximizes the value of its oil and gas. The company’s chemical subsidiary OxyChem manufactures the building blocks for life-enhancing products, while its Oxy Low Carbon Ventures subsidiary is advancing technologies and business solutions to economically grow its business while reducing emissions. As part of its green energy outreach, Occidental Petroleum seeks to advance a reduced-carbon world.

BofA’s price objective of $82 per share for OXY assumes $80 Brent and $75 WTI long-term crude prices, which are below current levels. BofA also is assuming long-term Henry Hub natural gas of $4.25.

Risks to reaching that price objective are any reduced oil and gas prices and margins, significant delays to the new upstream projects critical to OXY’s production targets and any cost pressures from operating expenses, capital expenditures and taxation, BofA wrote.

Chart Courtesy of www.stockcharts.com

Six Dividend-paying Energy Investments to Buy: APA

APA Corporation (NASDAQ: APA), a Houston-based holding company for Apache Corporation, an American-based hydrocarbon exploration business, received a $57 price objective from BofA. The valuation assumes a discounted cash flow value based on $80 Brent and $75 West Texas Intermediate (WTI) long term prices.

BofA also assumes long-term Henry Hub natural gas prices at $4.25. The investment firm further used a long-term, post-tax weighted average cost of capital (WACC) of 9.7%, based on the BofA strategy team’s assumed risk premium and a five-year monthly beta.

Potential outperformance of that estimate could come from higher-than-expected commodity prices, as well as exploration success in Suriname and Egypt, BofA opined. Increased drilling activity in the latter land also could help. Risks to achieving BofA’s price objective are reduced commodity prices,  Egyptian political risk and exploration risk in Suriname, the investment firm added.

Chart Courtesy of www.stockcharts.com

Six Dividend-paying Energy Investments to Buy: OVV

Denver-based Ovintiv Inc. (NYSE: OVV) (TSX: OVV), a North American energy producer focused on developing its multi-basin portfolio of oil, natural gas liquids and natural gas producing plays, received US$66 and CN$89 price objectives from BofA. The price target assumes $80 Brent and $75 WTI long-term, BofA wrote in a recent research note.

The estimate is based on a long-term Henry Hub natural gas price of $4.25. The valuation applied a long-term, post-tax WACC of 9.7%, based on the BofA strategy team’s assumed risk premium and a five-year monthly beta.

In addition, Ovintiv announced on Sept. 26 that it received regulatory approvals for the renewal of its share buy-back program. This action is consistent with the company’s capital allocation framework, which returns at least 50% of post-base dividend Non-GAAP Free Cash Flow to shareholders.

Risks that could cause the price target to be missed include the oil and gas prices and margin environment, significant delays to the new upstream projects critical to Ovintiv’s production goals, an inability to capture the price environment due to cost pressures from operating expenses, capital expenditures and taxation. Other risks encompass potential currency exchange challenges and whether the purchase of certain Midland Basin assets closes by mid-2023.

Possible outperformance could stem from improved cost of capital as Ovintiv deleverages its balance sheet or from increased oil and gas prices.

The Toronto Stock Exchange accepted Ovintiv’s notice of its intention to renew normal course issuer bid (NCIB) to purchase up to 26,734,819 common shares during the 12-month period starting October 3, 2023, and ending October 2, 2024. The number of shares authorized for purchase equals 10% of Ovintiv’s public float as of September 21, 2023, pursuant to TSX rules. The purchases will be made on the open market through facilities of the TSX, New York Stock Exchange (NYSE) and/or alternative trading systems at the market price at the time of acquisition, the company reported.

Ovintiv reported on Sept. 11 that it priced an underwritten public offering of 15,000,000 shares of its common stock by NMB Stock Trust, a Delaware statutory trust, for gross proceeds of about US$684.8 million. Plus, Ovintiv will not sell any shares of its common stock in the offering and will not receive any proceeds from the sale. The offering closed on September 13, 2023, with J.P. Morgan serving as underwriter.

Chart Courtesy of www.stockcharts.com

Six Dividend-paying Energy Investments to Buy: ExxonMobil

ExxonMobil’s “product solutions” business recently provided a progress report halfway through its eight-year strategy for its combined downstream and chemicals businesses. BofA Global Research’s latest research note on the stock showed the oil giant is ahead of its management’s current plan of forecasting almost triple earnings from 2019 through 2027.

“While this seems to be a haircut by the market on imprecise visibility, management has provided a new level of transparency that suggests it is about 60% of the way there, with an incremental mid-cycle product solutions contribution to FCF [free cash flow] that we believe could be 25% of total company value,” wrote Doug Leggate, a BofA oil industry research analyst.

Under mid-cycle conditions, ExxonMobil’s management provided guidance that the company would earn $4 billion more than the run rate achieved in the first half of 2023 and $10 billion above 2019 under mid-cycle conditions for refining and chemicals, Leggate continued.

Six Dividend-paying Energy Investments to Buy: Transparency Breeds Confidence

“We took two key messages away from the presentations and ‘in-person’ discussion with management,” Leggate wrote. “First, is management’s confidence in delivery of these projects and the way it defines its contribution to earnings and cash flow. Our second takeaway is what is clearly a growth trajectory for chemicals & downstream that goes beyond 2027, with a similar level of spending that has funded its current project queue. What is not clear is whether the market has recognized the incremental value as sustainable given a start up that has coincided with the strong rebound in refining margins, blurring the contribution from new projects and efficiencies delivered so far. In our view, risks to current estimates look skewed higher.”

Incremental value of $10 billion is reasonably about $120 billion or almost a quarter of XOM’s market capitalization when fully onstream, Leggate wrote. No other major oil stock has that level of growth, he added.

“With an outlook that doubles cash flow through 2027 from 2019, we see little new that would materially change XOM’s trajectory defined by growth and rate of change in free cash flow that we believe can support relative outperformance vs. peers,” Legatte concluded. “We maintain our Buy rating and $145 PO (price objective).”

Chart Courtesy of www.stockcharts.com

Six Dividend-paying Energy Investments to Buy: Offer Alternative Energy

ExxonMobil’s management recoignizes the need to include alternative energy in its product offerings, said Michelle Connell, head of Dallas-based Portia Capital Management. The oil behemoth recently announced the acquisition of Denbury, a $4.9 billion Dallas company that focuses on carbon capture and oil recovery, she added.

This acquisition will help smooth out the seasonality of XOM’s cash flow/revenue, Connell continued. Exxon Mobil will benefit from large tax incentives by participating in this green energy segment.

In the last few years, ExxonMobil has focused on lowering the costs of its headquarters and personnel, Connell commented. The cost-cutting also included the trimming or paying down the company’s debt that is expected to continue for the next several years. Another plus is that ExxonMobil has a “strong” annual free cash flow of $5 billion, she added.

Michelle Connell leads Dallas-based Portia Capital Management.

ExxonMobil currently has a dividend yield of 3.14% that is expected to increase to 4% during the next 3-4 years, Connell told me. Even though the stock has gained 13.63% in the past year, 1.29% so far this year, 2.80% in the last three months and dipped 4.00% in the past month, Connell estimated XOM could climb at least 10-15% in the next 12 months.

The company’s price-to-earnings (P/E) ratio is 8.57%, well below its average P/E of 17. Plus, ExxonMobil’s gross margins are now 28%, compared to 2020 when gross margins were just 4%.

ExxonMobil also is stepping up production at its low-cost facilities, such as the ones in Guyana and the Permian basin, while reducing output at its high-cost production plants, Connell counseled. Management’s goal is to triple ExxonMobil’s profits by fiscal year 2027, she added.

Six Dividend-paying Energy Investments to Buy: Rising Political Risk

Russia’s invasion of Ukraine remains a key factor in keeping oil prices high. To help fund its continuing invasion of Ukraine, Russia has  limited production to keep prices up. OPEC leader Saudi Arabia also has curtailed production to draw down global inventories.

Political risk could climb further in the months and year ahead after the Russian Defense Ministry released documents recently indicting its military spending could rise by more than 68% in 2024 to reach $111.15 billion. That amounts to about 6% of Russia’s gross domestic product (GDP), more than the country’s spending on social programs, according to Moscow Times. Russia’s military spending is set to total about three times more than education, environmental protection and health care spending combined.

The six dividend-paying energy stocks to to buy could appeal to investors seeking both income and capital appreciation, as well as a way to profit from rising political risk. That is especially true with Russia’s invasion of Ukraine triggering a fierce counteroffensive. Ukraine lately has launched strikes against positions in the Crimea region that that Russia has held since its previous land-seizing invasion in 2014. However, Russia is using minefields, networks of trenches and formidable tank barriers to thwart the advances of Ukrainian soldiers and inflict casualties aimed at weakening the resistance. Russian also fired a missile at a village near Karkiv, Ukraine, on Oct. 5 that killed 52 civilians at a funeral ceremony that marked one of the deadliest attacks of the war in months.

Paul Dykewicz, www.pauldykewicz.com, is an 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. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, 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. The uplifting book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.