With the New Year, it's time for investors to recalibrate their portfolios. Last year was an annus mirabilis for energy investors thanks to high energy prices. The oil markets continue being volatile and turbulent thanks to the pandemic and the ongoing energy transition.
But so far, so good. It's still early days, but the energy sector has jumped out of the gates flying. After the first full trading week in 2022, the energy sector's favorite benchmark Energy Select Sector SPDR ETF (NYSEARCA:XLE) has gained 9.0% vs. -1.5% by the S&P 500.
Indeed, oil prices are now trading at their highest level in more than a month, with both Brent crude and WTI trading above $80 as Omicron fears continue easing. A new study conducted by South African scientists suggests that Omicron could displace the Delta variant of coronavirus because infection with the new variant boosts immunity to the older one. So far, people who contract Omicron are presenting with milder symptoms than those who get infected with Delta and are also less likely to be hospitalized.
Wall Street remains largely bullish on the energy sector, with some analysts predicting even higher oil prices in 2022.
Barclays has predicted that the WTI contract price will average $77/bbl in 2022, up from $73 in Q4 2021, noting that the Biden administration's sale of oil from the Strategic Petroleum Reserve isn't a sustainable way to bring down prices. Barclays says prices could go even higher than that forecast if COVID-19 outbreaks are minimized and thus allow demand to grow more than expected.
Goldman Sachs shares that bullish outlook and has predicted a Brent price of $85 per barrel by 2023.
If you are looking for solid energy dividends, here are the top aristocrats and payout leaders.
#1. ExxonMobil
Dividend Yield (Fwd): 5.15%
52-Week Returns: 53.2%
The United State's largest integrated oil and gas company, ExxonMobil Corp. (NYSE:XOM), is also one of the leading dividend aristocrats in the energy sector.
Exxon Mobil Corp has been named to the Dividend Channel ''S.A.F.E. 25'' list, signifying a stock with above-average ''DividendRank'' statistics including a strong 5.15% forward yield, as well as a superb track record of at least two decades of dividend growth.
Over the past few years, Exxon has been struggling to pay its juicy dividend due to low oil and gas prices as well as its tradition of aggressive growth leading to high capital spending. Luckily, energy prices have improved dramatically over the past year, leaving the company with ample cash. Indeed, last term, Exxon's cash flow from operating activities clocked in at $9.3 billion, managing to fully fund the dividend and capital expenditures as well as pay down debt by over $4 billion.
#2. ConocoPhillips
Dividend Yield (Fwd): 2.34%
52-Week Returns: 80.4%
ConocoPhillips (NYSE:COP) is a top shale player that primarily engages in conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations. Last quarter, Bank of America upgraded COP shares to Buy from Neutral with a $67 price target, calling the company a "cash machine" with the potential for accelerated returns.
According to BofA analyst Doug Leggate, Conoco looks "poised to accelerate cash returns at an earlier and more significant pace than any 'pure-play' E&P or oil major."
Leggate COP shares have pulled back to more attractive levels "but with a different macro outlook from when [Brent] oil peaked close to $70."
But best of all, the BofA analyst believes COP is highly exposed to a longer-term oil recovery.
But BofA is not the only Wall Street punter that's gushing about COP.
In a note to clients, Raymond James says the company's stock price is undervaluing the flood of cash the oil and gas company is poised to generate.
Related: Shell’s Gas Trading Booms While Oil Trading Slows
Well, it appears the analysts were right on the money: three weeks ago, Conoco unveiled its preliminary plans for 2022, highlighting a three-tiered program that could see the company return around $7 billion in cash to investors in 2022.
COP provides a re-engineered shareholder return plan with:
1) Base dividend of $2.4B (2.5% of market cap)
2) Variable dividend of 20c/s in the coming quarter (1.1% of current market cap, annualized)
3) Share buybacks of $3.5B (3.7% of market cap)
If sustained, this positions COP shareholders for a 7.3% payout with little production growth. COP is penciling in a 36% increase in capex for the year (22% adjusting for the Permian purchase) but a mere 3% production growth. In effect, Conoco is set to return around $7 billion in cash to investors over the coming year.
The company is also making smart investments, including its $9.5 billion all-cash acquisition of Royal Dutch Shell's (NYSE:RDS.A) Permian Basin assets and also investing about $200 million in green projects to reduce its carbon emissions.
#3. MPLX LP
Dividend Yield (Fwd): 9.12%
52-Week Returns: 31.6%
For decades, master limited partnerships, or MLPs, have been a source of reliable, high-yield income for energy investors. An MLP is required by law to derive at least 90% of its cash flow from commodities, natural resources or real estate. They, in turn, distribute cash to shareholders instead of paying dividends like a standard company would. MLPs combine the liquidity of publicly traded companies and the tax benefits of private partnerships because profits are taxed only when investors receive distributions.
The biggest draw of MLPs is that they are considered pass-through entities under the U.S. federal tax code. Whereas most corporate earnings are taxed twice (first through earnings and again through dividends), the pass-through status of MLPs allows them to avoid this double taxation because earnings are not taxed at the corporate level. Another key benefit: Midstream MLPs act as toll collectors for the energy companies that use their pipelines. As such, their cash flows are protected by long-term, take-or-pay agreements, meaning they are less susceptible to commodity price fluctuations.
It's, therefore, hardly surprising that MLPs typically pay the highest distributions in the energy sector.
MPLX LP (NYSE:MPLX) is an Ohio-based crude oil and natural gas transportation and processing company. MPLX is one of the top dividend payers in the oil and gas business.
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MPLX has been making good progress reducing operating and capital expenses as well as securing and developing joint venture growth projects. In addition, parent company Marathon Petroleum Corp. (NYSE:MPC) recently completed the sale of its Speedway assets for $21 billion, with the proceeds to be used to pay down debt and shore up the company's balance sheet.
#4. Rattler Midstream LP
Dividend Yield: 8.26%
52-Week Returns: 19.7%
Rattler Midstream LP (NASDAQ:RTLR) provides water-related services to oil and gas shale producer Diamondback Energy (NASDAQ:FANG) in the Permian Basin in West Texas.
Rattler's management has been aggressively cutting back on capital expenditure which has helped support sustained free cash flow generation. Further, Rattler Midstream is not present on all the company acreage of Diamondback Energy which allows it to grow revenue at a time when Diamondback Energy has forecasted a period of no growth.
Other top-paying MLPs are:
- Plains All American Pipeline, L.P. (NASDAQ:PAA)--7.17% Fwd Yield
- Plains GP Holdings, L.P. (NASDAQ:PAGP)--6.61% Fwd Yield
- Magellan Midstream Partners, L.P. (NYSE:MMP)--8.73% Fwd Yield
- Enterprise Products Partners L.P. (NYSE:EPD)--7.99% Fwd Yield
- Kinder Morgan, Inc. (NYSE:KMI)--6.35% Fwd Yield
- The Williams Companies, Inc. (NYSE:WMB)--5.98% Fwd Yield
#5. NextEra Energy Partners, L.P.
Dividend Yield (Fwd): 3.52%
52-Week Returns: -1.0%
Many renewable energy companies operate in the red and, therefore, do not pay dividends. However, some are notable for their combination of solid financial standing and attractive dividend payouts. NextEra Energy Partners, L.P.(NYSE: NEP) belongs to the latter category.
NextEra Energy Inc. (NYSE:NEE) is a Florida-based clean energy company and America's largest electric utility holding company by market cap. NEE is the world's largest producer of wind and solar energy, with 45,900 megawatts of generating capacity. The company owns eight subsidiaries, with the largest, NextEra Energy Services, supplying 5 million homes in Florida with electricity.
NextEra Energy Partners, L.P. is one of NextEra Energy Inc.'s subsidiaries. NextEra Energy Partners acquires, owns, and manages contracted clean energy projects in the United States. The company owns a portfolio of contracted renewable generation assets consisting of wind and solar projects, as well as contracted natural gas pipeline assets.
NextEra Energy Partners owns interests in dozens of wind and solar projects in the United States, as well as natural gas infrastructure assets in Texas. These contracted projects use leading-edge technology to generate energy from the wind and the sun. Although NEP currently pays a modest 3.52% yield, the company's management is shooting for 12-15% dividend growth through 2024, making this a good stock for income investors looking for growth.
By Alex Kimani for Oilprice.com
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