2019 was without a doubt a dead year for some of the largest oil and gas producers. Their stock prices struggled to break out of a slow cycle caused by oversupply and concerns about possible recession when the US and China became embroiled in a bitter trade war.
The Energy Select Sector SPDR ETF (NYSE :), which owns large capital stocks in the US, has lagged enormously behind the index this year and only rose 1 percent when the benchmark rose nearly 25%.
Unfortunately, the prospects for and companies in 2020 are just as uncertain as last year. The sharp rise in American slate oil and gas, coupled with some signs of an economic slowdown in the world's major oil-consuming countries and the ongoing trade dispute between the US and China, have dampened the chances of a sharp recovery in oil prices.
This scenario, if it continues to play out in 2020, means that investing in oil stocks is not a gamble because the risks to further downward pressure on oil prices remain high. For investors in oil stocks, the choice to make remains very simple: keep buying stocks that pay higher dividends and where companies demonstrate the financial discipline to drive through a persistent weakness in oil prices.
This approach certainly makes sense, especially when the US Federal Reserve is firmly on the sidelines and ready to economize if the economy justifies such a move. A bright spot for oil bulls that some analysts emphasize is that US crude oil has swapped surprisingly between $ 50- $ 60 per barrel in the last six months and is on track for the best year since 2016.
A Sweet Spot
For them, this range is a good place for both producers and consumers, where the large integrated oil companies can generate strong cash flows without consumers being squeezed too hard.
Net bets on higher US crude prices by hedge funds and other speculative investors rose to their highest level in two months during the week ending November 26, according to data from Commodity Futures Trading Commission. The ratio between bullish bets and bets on lower prices is almost 6: 1, well below the peaks of April, but still much higher than mid-October.
In the midst of these conflicting signals about supply and demand from the oil market, we continue to recommend purchasing dividend-paying energy stocks. Integrated energy producers, such as Chevron Corp (NYSE 🙂 have often let them down see that they can tolerate a long-term recession much better and can still support their dividends.
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 in which 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 7%, 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 $ 0.94 per quarterly payout
Bottom Line
Investors may not see a strong recovery in global oil prices in 2020, a situation that could depress the oil company's stock prices. However, investing in shares with a higher return and stable cash flows makes sense if you are a long-term investor, with a focus on dividend income.
