9 Top Dividend Stocks in the Energy Sector after the OPEC Meeting

This is a guest contribution from The Dividend Manager

Energy stocks have seen a lot of volatility over the last two years as the supply of oil increased and the price of oil plummeted. In 2014, the price of a barrel of Crude Oil WTI was over $100. By the beginning of 2015, the price was under $50 per barrel. The final bottom in price occurred earlier this year when crude hit $25 a barrel. The chart below illustrates the downfall of crude oil prices since 2012. While the price has rebounded since the February lows, it has not come close to rebounding to its 2014 price high.

crudeoil1

On November 30th, 2016 the Organization of Petroleum Exporting Countries (OPEC) agreed to cut crude oil production by 1.2 million barrels a day. Currently, production is at a record high, at 33.6 million barrels per day. This will be the first cut in production since 2008, but there is still expected to be a significant surplus in oil supply. This production cut will likely drive up the price of Crude Oil WTI and make many energy companies more profitable.

The news sent many energy stocks soaring.The Energy Select Sector SPDR ETF (NYSE: XLE) jumped over 5% following the news (compared to year-to-date performance of +10%).This bump comes after many of these stocks jumped as part of the “Trump Rally” following the election, and has many energy investors excited about current performance and how the new production may impact oil prices going forward. WIth large tax cuts and decreased regulation on the way in 2017, many of the energy companies listed below should profit from increased economic growth.

The stocks below are the energy stocks that I maintain on our Top 100 Dividend Stocks list. My favorites include Occidental Petroleum, Schlumberger, Total SA ADR, and Valero. While some investors have been spooked by the energy sector in the last two years, there are many intriguing stocks with high dividends & excellent dividend growth prospects now that oil has crossed back above $50 a barrel.

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Disruptive Technologies & Exponential Growth

Lately, I’ve been thinking a lot about disruptive technologies & exponential growth. Over the course of past few weeks, discussions have been abound between fellow bloggers Jay from FI Fighter, Bryan from Income Surfer, and yours truly discussing investment themes. In trying to identify good investing options, we keep directing our focus towards technology and its disruptive nature. It is no secret that the ‘green’ movement is not a niche anymore and is now mainstream.

Jay from FI Fighter recently posted this article: Disruptive Technology – Always Underestimated, which I highly recommend readers to read and follow the thought process and also follow up on the links posted (there’s a lot there). It presents a great picture of how things are changing. Fast.

We humans are terrible at understanding exponential growth. Due to the way we evolved, we humans always think in linear terms or incremental changes. We don’t expect things to change fast and almost always get the timelines wrong. Even the ‘green’-oriented media gets most timelines wrong. When making predictions, they always predict that things will look better for the solar and renewable energy space by 2040 or 2050. That timeline is completely off-base. When you truly understand exponential growth, you realize that its going to come much faster than that.

linear-vs-exponential-41

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Recent Sell – Chevron Corp

Chevron Small

Another week and another sale. I cant remember when I had back-to-back sales in my portfolio. Like I’ve mentioned in the past, I normally do not like to sell and prefer holding shares forever. But sometimes you just have to face the reality and pull the trigger on some companies.

Yesterday, I decided to sell and close our position in Chevron Corp (CVX). Chevron is still one of the largest oil & gas companies in the world and own immense assets across the world. But as oil prices have collapsed and have stayed depressed for almost two years now, the low prices have resulted in the company taking some eyebrow-raising moves. First, Chevron resorted to cutting its buyback program (I’ve always remained critical of stock buybacks. Companies, no different than retail traders driven by emotion, buy when stock is expensive and terminate such programs when the stock is cheap) and more recently has resorted all sorts of financial engineering to prop up its books.

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Kinder Morgan Inc (KMI) Consolidation

Kinder Morgan announced that it is consolidating its vast oil and gas pipeline empire in a $70B single company. The company announced that it is shedding its tax-advantaged legal structure it had popularized during the US shale boom; the MLP into one company. This will transform Kinder Morgan Inc into a $92B market cap mega-corporation. This combined entity will be the largest energy infrastructure company in North America and the third largest energy company overall.
The affected units include Kinder Morgan Energy Partners LP (KMP), Kinder Morgan Management  LLC (KMR) and El Paso Pipeline Partners LP (EPB). KMP shareholders will receive 2.1931 shares of KMI and $10.77 in cash; KMR shareholders will receive 2.4849 shares of KMI; EPB shareholders will receive 0.9451 shares of KMI and $4.65 in cash. Both KMP and EPB shareholders will be able to elect cash or KMI stock consideration subject to proration.
There is also some great news for KMI shareholders (including your truly) – the expected dividends for 2015 are $2.00, a 16% increase over current $1.72 KMI pays at a yield of 4.76%. In addition, KMI is expected to grow dividends at a rate of 10% each year from 2015 to 2020.

The current and simplified company structure is show below (source: Kinder Morgan presentation):

Full Disclosure: Long KMI. My full list of holdings is available here.

Recent Buy – Kinder Morgan Inc (KMI)

I initiated a new position in Kinder Morgan Inc. (KMI). Kinder Morgan Inc owns and operates energy transportation and storage assets in US and Canada. KMI is the fourth largest energy company in N.America, owning an extensive network of pipelines for natural gas, crude oil and petroleum products. The company owns an interest in or operates approximately 75,000 miles of pipelines and 180 terminals.
Corporate Profile (from FinViz):
Kinder Morgan, Inc. owns and operates energy transportation and storage assets in the United States and Canada. The company operates in six segments: Natural Gas Pipelines, Products PipelinesKMP, CO2KMP, TerminalsKMP, Kinder Morgan CanadaKMP, and Other. The Natural Gas Pipelines segment consists of approximately 62,000 miles of natural gas transmission pipelines and gathering lines, as well as natural gas storage, treating, and processing facilities. The Products PipelinesKMP segment consists of approximately 8,600 miles of refined petroleum products pipelines that deliver gasoline, diesel fuel, jet fuel, and natural gas liquids to various markets; and approximately 62 associated product terminals and petroleum pipeline transmix processing facilities. The CO2KMP segment produces, markets, and transports carbon dioxide to oil fields through approximately 1,500 miles of pipelines; owns interests in and operates seven oil fields in Texas; and owns and operates a 450-mile crude oil pipeline system in Texas. The TerminalsKMP segment owns and operates approximately 113 liquids and bulk terminal facilities; and approximately 35 transloading and materials handling facilities that transload, store, and deliver various bulk, petroleum, petrochemical, and other liquid products. The Kinder Morgan CanadaKMP segment transports crude oil and refined petroleum products through approximately 2,500 miles of pipelines from Alberta to marketing terminals and refineries in British Columbia in Canada, Washington state, and the Rocky mountains and central regions of the United States; and 5 associated product terminal facilities. The Other segment includes various physical natural gas contracts with power plants. The company was formerly known as Kinder Morgan Holdco LLC and changed its name to Kinder Morgan, Inc. in February 2011. Kinder Morgan, Inc. is headquartered in Houston, Texas.
Recent Buy Decision:
Kinder Morgan Inc has been on my radar for the past few months and I finally decided that it was a good time to initiate a position.
  • Kinder Morgan has had a bit of a see-saw year in 2013. The stock took a bit of a beating in December 2013 after this news release from the company – where the company stated that it was seeing some loss of income in its Kinder Morgan Energy Partners L.P (NYSE: KMP) and El Paso Pipeline Partners L.P. (NYSE: EPB) division. However, the business model is robust and KMI reported an expected dividend growth rate of 10% for 2014, right in line with their previous growth rate.
  • Recently it was announced that Kinder Morgan acquired an oil tanker business, American Petroleum Tankers and State Class Tankers for just under $1B (source).
  • I only own one pipeline stock in my portfolio – Inter Pipeline Ltd (TSE: IPL) and was debating whether to add another equity in this industry. In an endorsement for the future of the industry, Warren Buffett and Berkshire Hathaway announced that the big play for 2014 is Pipelines (source).
All the reasons above considered, I decided that KMI was a great stock and attractively valued at current levels and decided to initiate a position.
Risks:
Pipeline stocks, Kinder Morgan Inc included, are sensitive to interest rate rises. Most investors tend to move their money into sectors such as REITs, pipelines and utilities in low-rate environment. When the interest rates rise, these sectors tend to suffer as the money finally leaves for the safety of bonds.
A summary of the stock:
  • Symbol: NYSE: KMI
  • Quote: $36.19
  • 52-week Range: $32.30 – $41.49
  • Debt/Equity: 2.71
  • Yield: 4.53%
  • 5-yr Dividend Growth Rate: 10%
What are your thoughts on KMI?My full list of holdings can be found here.