As OPEC+ gets ready for its next meeting to discuss easing its oil output restrictions, both the WTI and Brent benchmarks were trading down nearly 2% on Monday as a cross-section of health experts warned that the new Delta variant of the coronavirus could cause "dense" outbreaks in U.S. states with low vaccination rates.
Fears over the spread of the highly infectious Delta variant are causing jitters at a time when the markets are on edge after the Fed jolted traders with a hawkish tilt earlier this month.
In Europe, Portugal, Spain, and Germany have all issued new travel restrictions to control the spread of the new variant while the situation is not much better in Asia with Malaysia set to extend a lockdown; Thailand has announced fresh restrictions while Indonesia is grappling with record-high cases.
Nevertheless, oil prices remain within striking distance of their recent two-year highs, and Wall Street remains largely optimistic about the mid-term oil price outlook.
Piper Sandler says that whereas the backdrop of tighter monetary policy, the trajectory of the economic recovery, and the sustainability of inflation are likely to create some volatility curveballs, they will not be enough to derail the secular bull market.
The optimism has coincided with a breakout season for the S&P 500, with the Energy Sector (XLE) being particularly impressive.
Indeed, the fossil fuel sector is enjoying a rare blowout season: Over the past few earnings seasons, the majority of companies in the energy sector have comfortably beaten Wall Street's expectations
With impressive bottom-line growth, many top energy names are returning more capital to shareholders in the form of dividends and share buybacks. Companies usually repurchase shares when they believe they are undervalued, a big endorsement for oil and gas bulls.
If you are looking for solid energy dividends, here are the top aristocrats and payout leaders.
#1. Integrated Oil and Gas
Dividend Yield (Fwd): 5.52%
YTD Returns: 52.9%
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 5.52% forward yield, as well as a superb track record of at least two decades of dividend growth.
Last quarter, Exxon reported that industry fuel margins have improved considerably from the fourth quarter but still remain below 10-year-lows due to high product inventory levels as well as market oversupply.
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The best part: Cash flow from operating activities clocked in at $9.3 billion, managing to fully fund the dividend and capital expenditures as well pay down debt by over $4 billion.
Dividend Yield (Fwd): 5.15%
YTD Returns: 23.1%
At a time when the vast majority of oil and gas companies have been reporting blowout earnings, America's second-largest E&P company, Chevron Corp. (NYSE:CVX), was a notable laggard, managing to swing to a profit but missing on both top-and bottom-line expectations.
Still, Chevron declared a $1.34/share quarterly dividend, good for a 3.9% increase from the prior dividend of $1.29. The shares now sport an impressive 5.15% forward yield.
Chevron reported Q1 2021 Q1 GAAP earnings dropped to $1.38B, or $0.72/share, from $3.6B, or $1.93/share, in the year-ago period. GAAP EPS of $0.72 was 0.16 below the consensus while revenue of $31.07B (+4.6% Y/Y) missed by $1.48B.
A big offender was Chevron's refining and chemical units, which reported a Q1 profit of just $5M vs. a $1.1B a year ago, which the company attributed to the February winter storm in Texas as well as the continuing impact of the pandemic.
Meanwhile, Q1 production of 3,121 was below the consensus of 3139 Mboe/d.
#2. Master Limited Partnerships
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 as 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. Here are some top payers.
Dividend Yield (Fwd): 9.52%
YTD Returns: 33.5%
MPLX LP (NYSE:MPLX) is an Ohio-based crude oil and natural gas transportation and processing company.
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.
Rattler Midstream LP
Dividend Yield: 8.44%
YTD Returns: 11.3%
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)–6.45% Fwd Yield
Plains GP Holdings, L.P. (NASDAQ:PAGP)–6.16% Fwd Yield
Magellan Midstream Partners, L.P. (NYSE:MMP)–8.48% Fwd Yield
Enterprise Products Partners L.P. (NYSE:EPD)–7.62% Fwd Yield
Kinder Morgan, Inc. (NYSE:KMI)–6.01% Fwd Yield
The Williams Companies, Inc. (NYSE:WMB)–6.25% Fwd Yield
#3. Exchange Traded Funds
Energy Select Sector SPDR ETF (XLE)
Expense Ratio: 0.12%
Dividend Yield: 3.95%
YTD Returns: 41.1%
With more than $25 billion in Assets Under Management (AUM), Energy Select Sector SPDR ETF (NYSEARCA:XLE) is the largest dedicated energy fund. It's also the most liquid and also one of the cheapest in the space.
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XLE tracks the price and yield performance of companies in the Energy Select Sector Index. The index offers investors broad exposure to companies in the oil, gas and energy equipment industries. One shortcoming though is that the ETF has 26 stocks in its portfolio, with ExxonMobil (NYSE:XOM) and Chevron Corp.(NYSE:CVX) its top holdings.
Vanguard Energy ETF
Expense Ratio: 0.10%
Dividend Yield: 3.32%
YTD Returns: 45.2%
Vanguard funds are popular for undercutting the competition on costs; the Vanguard Energy ETF (NYSEARCA:VDE) has remained true to this ethos by offering the lowest pricing in the sector. With 97 stocks in its portfolio–albeit with less AUM– VDE is better diversified than XLE, though XOM and CVX still play outsized roles.
VDE tracks the performance of the MSCI US Investable Market Index (IMI)/Energy 25/50, an index consisting of stocks of large- and mid-cap US energy companies.
#4. Renewable Energy
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.
Here are a few.
Dividend Yield (Fwd): 4.85%
YTD Returns: -15.0%
New Jersey-based Clearway Energy Inc. (NYSE:CWEN) operates a large-scale U.S. renewable energy portfolio with approximately 4,200 net megawatts (MW) of installed wind and solar generation projects and 2,500 net MW of natural gas generation facilities, as well as a portfolio of district energy systems. Clearway Energy primarily sells electric power under long-term PPAs, enabling it to generate stable cash flows to reliably pay dividends.
Clearway Energy benefits from a close relationship with $54-billion fund manager Global Infrastructure Partners and Clearway Energy Group (CEG), a separate entity that develops renewable energy projects. CEG has more than 10 GW of renewable energy under development, which gives Clearway access to an attractive range of investment and acquisition opportunities.
Clearway has a target to grow its dividend by 5% to 8% annually in the coming years.
NextEra Energy Partners, L.P.
Dividend Yield (Fwd): 3.42%
YTD Returns: 11.1%
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.(NYSE: NEP) is one of NEE'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. The company's management is shooting for 12-15% dividend growth through 2024, making this an ideal stock for income investors.
By Alex Kimani for Oilprice.com
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