3 Oil and Gas Companies that Income Investors Should Love

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Income investors should really focus their attention on several big oil and gas corporations due to their huge proved reserves, cheap valuation and juicy dividend yields. George Putnam has pointed out eight energy companies which satisfied those above-mentioned criteria. In this article, we will take a closer look at three global integrated energy giants: BP (NYSE: BP), Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP). We will try to determine whether or not we should invest in those three stocks at their current trading prices.

BP – The highest total yield for shareholders

BP, the leading British integrated energy company, has around 17 billion BOE in its proved reserves. In the first quarter of 2013, the company generated as much as $4.2 billion in underlying replacement cost profit which was 30% higher than analysts’ estimates. BP is trading at $41.30 per share, with a total market cap of around $131.80 billion. The market values BP quite cheaply at only 7.2 times its forward earnings. Income investors might love BP with its juicy dividend yield as high as 5.2%.

Several months ago, BP restructured its Russian operations by trading its 50% stake in TNK-BP to Rosneft for around $12.5 billion in cash and an 18.5% stake in Rosneft. Right after the deal, BP announced that it would return as much as $8 billion in cash to its shareholders in the next 12-18 months by repurchasing shares on the market. Consequently, investors might expect to realize an additional 6% yield from the potential share buyback at its current trading price. The total yield (dividends + share buybacks) reaches 11.2%.

Chevron – Consistent growth in dividends with some share buybacks

Chevron is one of the biggest oil and gas companies in the world, with around 11.4 billion BOE in its proved reserves including 6.5 billion of barrels of liquids and 29.2 trillion cubic feet equivalent of natural gas. In 2012, Chevron delivered earnings of $26.2 billion, with the return on common equity of 18.7%.The company derived most of its operating earnings, $23.8 billion, or 85% of the total 2012 earnings, from the upstream business. It also returned a lot of cash to its shareholders. In 2012, Chevron has increased its dividends by 11.1% and bought back around $5 billion worth of shares.

Chevron has raised its dividends consistently, from $1.43 per share in 2003 to $3.51 per share in 2012. Interestingly, the company seems to have quite a conservative dividend policy with a low payout ratio of only 27%. At $121.20 per share, Chevron is worth $235 billion on the market. The market values Chevron at a higher valuation of 9.7 times its forward earnings. The company's dividend yield is also quite decent, at 3.3%.

In the first quarter of 2013, Chevron has repurchased around $1.25 billion worth of shares. It expected to buy back the similar amount in the second quarter as well. If this trend continues, Chevron might spend around $5 billion in buybacks by the end of the fourth quarter to create an annualized buyback yield at 2.13%. Consequently, the potential total yield could reach 5.43%.

ConocoPhillips - The pure E&P play with decent dividend yield

ConocoPhillips seems to be more focused on exploration and production (E&P) than any of the other big integrated energy companies. It is considered the largest independent E&P company in the world and has a diverse asset base with around 8.6 billion BOE in proved reserves. The company's total resources were estimated to reach 43 billion BOE including 69% liquids, 25% gas and 6% liquid natural gas.

Looking forward, ConocoPhillips expects its production to grow at the rate of 3%-5% with a 3%-5% margin growth rate. Between 2013 and 2017, the company looks to spend around $16 billion in annual capital expenditure. Of this, around 40% of the total capital expenditure will be for development programs, 30% for major projects to produce strong production growth, 15% on exploration & appraisal and 10% on base maintenance.

The company currently trades at $63 per share, with a total market cap of around $77 billion. The market values ConocoPhillips at 10.5 times its forward earnings. Income investors might also like the company because of it juicy dividend yield at 4.2%.

My Foolish take

With great oil and gas asset bases, decent dividend yields and potential share buybacks, these three companies could be considered good long-term holdings in investors’ energy portfolios. Among the three, I like BP the most because of its high level of proven reserves and its low earnings valuation. Moreover, BP could potentially deliver a total yield of more than 11.2% to its investors, including 5.2% in dividend yield and an additional 6% from its share buybacks in the next 12 to 18 months.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus