Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.
Pumping Out the Dividends in the Energy Sector
April 25, 2018
U.S. crude oil has been on a great recovery over the past year with West Texas Intermediate (WTI) rising from a low of $42.53 back on June 21 to a recent high of $68.64 on Monday, April 23.
This turnaround in crude oil is providing a lot more cash for exploration and production companies (E&P) as well as for the companies providing services in the oil fields. As a result, companies with the added cash prospects have started to rise again in the market.
And while many are good value – in today’s market they just got a bit better value after some interesting news from the American Petroleum Institute (API) and the Energy Information Agency (EIA).
US crude inventories are up in the weekly report by API showing that the Cushing storage facilities which is the major hub for US crude oil pipes and storage was up some 459 thousand barrels against expectations for a bit of a pull-back. And the EIA is reporting that overall US crude oil stockpiles was up some 2.17 million barrels against expectations for a decline.
WTI was off in price late yesterday and today trading around $67.61 a barrel. But overall demand continues to be on the rise and overall global production and stockpiles continue to support WTI prices heading into the $70 range and Brent crude (global price) heading into the upper $70 range.
Moreover, for US producers, EIA is reporting some near term better news as U.S. weekly crude exports hit a new high at 2.33 million barrels per day.
There are three dividend payers to take a peek at today. And I’ll start with Vermillion Energy (NYSE:VET).
Vermillion is a Calgary, Canada-based producer of oil and natural gas with field operations in Canada, Australia, France and The Netherlands. The company has been bolstering its revenues with higher petrol priced by some 15.1% over the past year. And with higher prices comes improving operating margins that are running at 13.2%. With debt low at a mere 32.4% of assets, the company can continue to invest to take advantage of the bullish market for oil and gas.
With a monthly dividend yielding 6.07%, it has already been increased once this year and projected to remain high or even higher given the overall market conditions.
Second is ARC Resources (OTCMKTS:AETUF) which is also based in Calgary with field operations in western Canada. Revenues are up 6.5% for the past year and operating margins are even fatter than for Vermillion at 40%. The company has lots of cash on hand and even less debt at only 14.6% of assets – so its capacity to invest in furthering production should remain positive to meet rising overall petrol demand. And its recently announced deal to acquire Spartan Energy (OTCMKTS:PTORF) is deemed by Moody’s as adding to Vermillion’s credit quality and capability.
The monthly dividend is sitting at 4.11% and while it has been quite steady, I would expect that as market conditions warrant that it could be boosted particularly with the added field production with Spartan.
And third is the oil field servicing company, Schlumberger (NYSE:SLB), out of Houston, Texas. Schlumberger is seeing a turnaround in revenues over the past year with gains of 9.5%. I see this company as a bit of a laggard on the higher crude priced market with producers beginning to contract for added support. This means that shares should see further improvement as the crude market gets a bit more leg.
With a value of 2.54 times its book value, it’s much cheaper than its recent five year high of near 4 times. And at 3 times its trailing sales – shares are also cheaper from recent highs of near 4.25 times sales.
The quarterly dividend is a bit less at 2.91% — but share price growth should provide added value with shares priced higher on projected improved demand for its services on the back of higher oil prices.