Can Dividend Investors Make Money in Oil Stocks?

The global oil market has been brutalized this year, under the two-headed hammer of the coronavirus pandemic crushing global oil demand, and the impact of oil giants fighting for market share and flooding the market with excess crude right when demand was crashing. As a result, billions of dollars have been […]

The global oil market has been brutalized this year, under the two-headed hammer of the coronavirus pandemic crushing global oil demand, and the impact of oil giants fighting for market share and flooding the market with excess crude right when demand was crashing. As a result, billions of dollars have been lost, and the energy sector is still down about 33% this year. 

But there has been some stabilization, and the strongest companies will survive. With multiple coronavirus vaccines now being administered, and a massive rollout of doses expected over the next six months, the future looks a little better for the oil patch. But survival isn’t the same thing as being worth investing in, particularly for dividend investors looking for a reliable source of income. On Oct. 29, Jason Hall, host of the “The Wrap” on Motley Fool Live, took the time to discuss the prospects for dividend investors looking at oil stocks. 

Short answer: The energy sector is still filled with risk and uncertainty, but there are a handful of oil stocks that should prove reliable and dependable dividend investments. Check out the video below for his top picks as dividend stocks in the oil industry that should prove safe and profitable. 

Transcript: 

Jason Hall: The energy sector, oil and gas, the oil patch. ExxonMobil (NYSE:XOM) just announced that they are not increasing their dividend. They’re breaking a 48-year stretch of dividend increases. So it’s probably going to knock them off the Dividend Aristocrats list. Oil prices today, West Texas Crude is in the $35 range today. Brent Crude, which is the big global benchmark for North Sea oil, that sets a lot of prices for a lot of things like gasoline and jet fuel, and that kind of thing, it’s in the $30s after spending most of the summer in the $40s. You’ve got Libya bringing a million barrels a day of oil back online after having zero for most of the year.

Global demand is still a mess. It’s rebounded in China, partly because they just bought up a bunch of cheap crude in the second quarter to stockpile. But we’re at risk right now. You’ve got parts of Europe that are locking down again to a second dip in global demand. You have Saudi Arabia, Russia, the rest of OPEC, a lot of oil out of Saudi Arabia and some of those other large sour crude deposits in the Middle East, they can pull oil out of the ground for single digit costs. Their actual cash costs are in the single digits. Global oil demand is still way down.

The implications for that mean that they’re going to fight for every barrel of oil and market share that they can and their most powerful tool is pricing power. That’s not to say the future is over for oil and that the US oil industry is done, but it just means that we have no clear path forward. We just don’t know what’s going to happen and it’s going to get harder and harder for these companies to continue to support dividends. I own Phillips 66 (NYSE:PSX). I anticipate that they will work really hard to continue to maintain their dividend. You have Enterprise Products Partners (NYSE:EPD). They’re a big pipeline company. You have Magellan Midstream (NYSE:MMP), another big pipeline company.

I think that those three are the most likely to be able to maintain their current dividend, because a lot of their businesses is based on volumes, and basically, tollbooth money. They charge for shipping and for storing crude, and natural gas, and refined products. Volume declines are not good for them, but they’re not as directly affected by (oil and gas) prices.

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Fri Dec 11 , 2020