If conflict between the US and Iran, one of & # 39; the world's largest oil producers, remains a possibility, oil stocks are finally starting to become attractive again. This week peaked at the fear that a serious break between the two powers would disrupt oil stocks from the Middle East, causing price inflation.
Oil extended its dramatic rise to $ 70 a barrel on Monday before making some profit when the effects of the murder of the US of one of the most powerful generals of the Islamic Republic continued. The US Department of Foreign Affairs warned of an "increased risk" of rocket attacks near military bases and energy facilities in Saudi Arabia.
U.S. Pat. President Donald Trump repeated his threat of further attacks if Iran took revenge. Crude oil was as long as the Saudi production facilities were attacked in September, eliminating around 5% of global production.
As we noted earlier, investing in a few large cap oil stocks should be part of the long-term strategy of investors to take advantage of scenarios as they currently evolve. That strategy was not that attractive to investors last year when US large-cap stocks lagged the broader market.
The Energy Select Sector SPDR ETF (NYSE :), with US stocks with a large capitalization, has barely admitted last year, even though it rose by more than 25%. But investing in oil stocks is a long-term gamble.
For investors in oil stocks, the choice remains easy to make, regardless of the recent rise in oil prices: buy shares from companies with good financial discipline, capable of generating healthy cash flows in both good and bad. times and who pay higher dividends.
This approach is even more logical given the drastic change in the dynamics of energy markets. The Middle East, for example, is losing its status as the largest oil producer. The shale revolution has made the US the largest oil producer in the world and
Disruption of the oil supply
In 2019, the US became a net exporter of crude oil for the first full month in at least 70 years. Production was 12.9 million barrels per day at the end of November, more than Iraq, Iran, Kuwait and the United Arab Emirates combined according to Bloomberg.
If the current hostility deteriorates, there is a good possibility that oil could trade in a much higher range than analysts predicted last year. This would offer many short-term opportunities for investors to make money, especially in the drilling machines whose balance sheets are in need and which need prices to go much higher in order to break even.
But we do not find that short-term approach very attractive, especially because several top analysts are skeptical about a continuing rise in oil prices. The cost of black gold may fall in the coming weeks if there is no major supply disruption due to the conflict between US and Iran, analysts at Goldman Sachs said in a note, adding that there is limited evidence of an acceleration of global growth that could support higher prices.
In our opinion, buying dividend-paying integrated energy producers, such as Chevron Corp (NYSE :), is a much better way to play oil strength. Chevron was the best performing Big Oil stock in 2019 after walking its share buyback program with 25% and dividend with 6%. CEO Mike Wirth follows a strategy where he is not prepared to spend much and instead focuses more on giving back capital to investors. With an annual dividend yield of 4%, the producer pays $ 1.19 per quarterly payout
For those with a slightly higher appetite to take risks and earn a dividend yield of no less than 6%, Royal Dutch Shell (NYSE 🙂 is your best choice. The energy giant has led the sector in switching from oil to natural gas and electricity production with a lower carbon content. It is also working on a $ 25 billion share repurchase plan, allowing its shares to be well supported. The producer pays $ 0.42 per quarterly payout.
London-based BP (LON 🙂 PLC (19459008) (19459007) NYSE 🙂 is another strong name when it comes to earning higher dividends. The current return is 6.45%, which translates into a quarterly payout of $ 0.615 per share. That payout has increased by only 5% since 2014, showing that the oil giant has since then had to contend with cash
One of the main reasons why BP has too little money is the oil spill in Deepwater Horizon 2010 in the Gulf of Mexico. The company is still paying for that disaster and will continue to do so for a few years. But if oil prices continue to rise, the energy giant is in a more robust cash position than previously predicted.
Bottom Line
Investing in reliable global energy stocks that offer higher returns and stable cash flows is a much better strategy than buying volatile oil stocks whose fate is closely linked to the direction of oil markets in the short term.
