The U.S. stock market is enjoying another banner year with five sectors boasting double-digit returns in the year-to-date. The S&P 500 Energy Sector has returned 10.4% YTD, below the S&P 500 average return at 15.4% but still the 5th best showing among 11 U.S. market sectors. It’s becoming increasingly clear that investors should not write off oil and gas stocks despite the ongoing clean energy transition. Indeed, under most key metrics, the U.S. oil and gas industry has flourished under the Biden administration despite its push towards a carbon-free future, proving that not even Washington has sufficient power to single-handedly sway large, globally interconnected markets like oil and gas.
Big Oil investors are hardly complaining: Profits of the top five publicly traded oil companies, namely Exxon Mobil Corp. (NYSE:XOM), Chevron Corp.(NYSE:CVX), BP Inc.(NYSE:BP), Shell Plc (NYSE:SHEL) and TotalEnergies SE (NYSE:TTE) rocketed to $410 billion during the first three years of the Biden administration, a 100% increase compared to the corresponding period of Donald Trump’s presidency.
Income investors hunting for a steady income stream should consider including high-yielding energy stocks in their portfolios considering that the sector remains the cheapest in the U.S. market. Stock analysts at Morningstar advise looking for stocks with durable dividends and buying those stocks when they’re undervalued.
“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield. Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps—companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability and reliability going forward,” explains Dan Lefkovitz, a strategist for Morningstar Indexes.
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Here are 5 Oil & Gas stocks that pay the highest dividends.
Ecopetrol S.A.
P/E (FWD): 4.76
Dividend Yield: 30.1%
Market Cap: $22.2B
Bogotá, Colombia-based Ecopetrol S.A. (NYSE:EC) operates as an integrated energy company engaging in the exploration and production of oil and gas in Colombia, the United States, Asia, Central America and the Caribbean, Europe, and South America.
Ecopetrol is currently engaged in talks with Occidental Petroleum (NYSE:OXY) to buy a stake in CrownRock, which Occidental agreed to buy in December in a $12B cash and stock deal. According to the filing, Ecopetrol could end up acquiring an even larger stake of as much as 49% in the Permian Basin assets. Occidental previously affirmed plans to sell $4.5B-$6B of assets within 18 months of closing the CrownRock purchase.
Previously, Ecopetrol CEO Ricardo Roa revealed the company is considering buying gas assets in Colombia from Canadian operator Canacol (OTCQX:CNNEF) due to ongoing concerns that Colombia will lose gas self-sufficiency in five years.
Unfortunately, Bank of America has downgraded EC shares to Underperform from Sector Perform with an $11 price target (current price at $10.88 per share), saying the macro environment in Colombia is hampering the oil and gas industry. BofA notes that Ecopetrol has struggled to replenish reserves, with the current reserve replenishment ratio at 48% and a lower average reserve life of 7.8 years.
CVR Energy
P/E (FWD): 38.3
Dividend Yield: 18.2%
Market Cap: $2.5B
CVR Energy, Inc. (NYSE:CVI) engages in petroleum refining and marketing, and nitrogen fertilizer manufacturing activities in the United States. CVI shares have been selling off after the com[nay revealed in May that it expects Q2 petroleum throughput to decline by ~8% in the wake of an April 28 fire at its Wynnewood, Oklahoma, refinery. The company expects total throughput in Q2 to clock in at 170K-190K bbl/day, ~8% below the 196K bbl/day midpoint guidance it gave in Q1, with capital expenses for petroleum operations of $35M-$50M, compared to $42M in Q1.
Back in March, CVR Energy disclosed it’s considering potential strategic transactions with Icahn Enterprises (NASDAQ:IEP) involving CVR Partners (NYSE:UAN). According to the company, the deal may include the acquisition of additional assets or businesses.
Diversified Energy
P/E (FWD): 6.18
Dividend Yield: 18.2%
Market Cap: $772.5M
Birmingham, Alabama-based Diversified Energy Company Plc. (NYSE:DEC) operates as an independent owner and operator of producing natural gas and oil wells primarily in the Appalachian Basin of the United States. Although this is one of the smaller energy companies, the stock is likely to see improved liquidity after it revealed it will be included in the Russell 2000 Index effective at the open of U.S. equity markets on July 1st, 2024.
"This is an important milestone for Diversified, and we look forward to communicating with a broader audience of investors, which we expect will expand our shareholder base and enhance the trading liquidity in our stock," said CEO Rusty Hutson.
Two weeks ago, Diversified Energy agreed to acquire east Texas natural gas properties and related facilities from Crescent Pass Energy (NYSE:CRGY)in an all-stock deal valued at ~$106M. The assets include 827 net operated PDP wells that are expected to add 38M cfe/day of production and 170B cfe reserves. The assets also include more than 500 miles of owned pipelines and associated compression facilities.
Petrobras
P/E (FWD): 4.25
Dividend Yield: 17.0%
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Market Cap: $93.1B
Petróleo Brasileiro S.A. (NYSE:PBR), aka Petrobras, is a state-owned Brazilian multinational that explores, produces, and sells oil and gas in Brazil and internationally. Brazil's oil and gas production has hit the highest level ever with oil output increasing 18.6%Y/Y to 3.51 million barrels per day while natural gas production grew 13.6%Y/Y to 154.08 million cubic meters per day.
Previously, global research and consultancy group Wood Mackenzie predicted that Brazil’s private oil companies will increase oil production by 75% from 1.221Mb/d to 2.123Mb/d by 2030. According to WoodMac, international oil companies such as Shell Plc (NYSE:SHEL), Equinor ASA, (NYSE:EQNR), TotalEnergies SE (NYSE:TTE), Repsol Sinopec Brasil S.A. and Petrogal will be among the top producers thanks to their partnership with Petrobras in the pre-salt and fields under development.
Last month, BofA upgraded PBR shares to Buy from Neutral with a $17.90 price target (21% upside from current price), raised from $16.80, citing important developments since the CEO change which have helped ease concerns on corporate governance, fuel pricing and dividends.
SandRidge Energy
P/E (TTM): 10.31
Dividend Yield: 14.3%
Market Cap: $497.1M
Oklahoma City, Oklahoma-based SandRidge Energy, Inc. (NYSE:SD) engages in the acquisition, development, and production of oil, natural gas, and natural gas liquids in the United States Mid-Continent. The company owns 817 net producing wells and operates approximately 368,000 net leasehold acres in Oklahoma and Kansas, as well as total estimated proved reserves of 71.3 million barrels of oil equivalent.
SandRidge has lately been posting negative results with oil production declining nearly 30% over the past year as its oil wells deplete. The company reported Q1 2024 revenue of $30.28M (-29.8% Y/Y) after producing 15,100 BOEPD (15% oil), above its full-year guidance for an average of 14,500 BOEPD (15% oil), despite the acquisition of additional working interests in producing NW Stack wells. The company generated $14.5 million of free cash flow for the three-month period ended March 31, 2024 and had $208.5 million of cash and cash equivalents, including restricted cash.
By Alex Kimani for Oilprice.com
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