Global oil prices have been on the backfoot recently amid production increases and worries about the global economy, perhaps setting up the sector for a test of a relatively new way of doing business while at the same time offering a potential entry point for investors looking for bargains.
In recent years, oil and gas companies have prioritized dividends and buybacks after investors got fed up with producers focusing more on extracting oil, even if it was at diminishing returns during lower-oil-price environments.
But it’s not only capital allocation concerns that have fueled this shift, as environmental, social and governance (ESG) investing concerns have surfaced and governments have been seeking to decarbonize their economies.
ESG scrutiny, capital inefficiency and energy-transition trends motivated public operators to shift from a growth-at-all-costs model to one focused on capital discipline and shareholder returns, experts say. That may have pleased shareholders, but this year could see the first true test of the capital-light, yield-focused model.
Rising tariffs have introduced uncertainty about the global economy and, in turn, global oil demand. Additionally, OPEC supply increases have pressured prices and free cash flow. With a larger share of that cash flow earmarked for shareholder distributions and debt service, the trade-off gets trickier when prices fall: Cut capital expenditures and risk future volume declines, or sacrifice dividends and turn off investors.
More broadly, a risk is simply the historic volatility of the boom-and-bust energy market, which is tied to the ebbs and flows of the global economy.
“Commodity prices are difficult, if not impossible, to predict,” says John Bocock, a portfolio manager with investment advisor Pinnacle Associates. “Any energy sector investment should not be overly dependent upon strong commodity prices.”
With all that in mind, here’s a look at seven top oil and gas stocks, with their forward dividend yields and price-to-earnings ratios as of early June:
| Oil/Gas Stock | Forward Dividend Yield | Forward P/E |
| Exxon Mobil Corp. (ticker: XOM) | 3.8% | 14 |
| Chevron Corp. (CVX) | 4.9% | 14 |
| Williams Cos. Inc. (WMB) | 3.3% | 25 |
| Cheniere Energy Inc. (LNG) | 0.8% | 17 |
| Golar LNG Ltd. (GLNG) | 2.4% | 41 |
| Argan Inc. (AGX) | 0.6% | 28 |
| Schlumberger Ltd. (SLB) | 3.4% | 10 |
Exxon Mobil Corp. (XOM)
This oil and gas supermajor often makes the list of experts’ top picks for oil and gas stocks. Like other Big Oil companies, supermajors are vertically integrated, meaning they own the entire supply chain, from exploring for hydrocarbons, getting oil and gas out of the ground and refining it, to transporting it and selling it to end consumers.
When it comes to the renewable energy transition, Exxon has deep pockets to spend on new technologies. It has focused on carbon capture and storage, hydrogen, lower-emission fuels and lithium, a key mineral for electric vehicle batteries and grid storage.
Still, all of the supermajors remain oil and gas companies at heart, as they try to balance the push for decarbonization with continued demand for their core fossil fuel products.
“Generally speaking and remembering that oil prices are notoriously difficult to predict, we view the oil majors as relatively attractively priced dividend plays,” says Bocock. “They are probably more attractive now than they have been over the past decade, given their dividend yields and low valuations, as large investors look for returns beyond large-capitalization technology companies.”
Chevron Corp. (CVX)
Igor Isaev, head of brokerage Mind Money’s Analytics Center, also points to the bigger names, including Chevron, that offer diversification, financial strength and dividends.
Amid concerns about deteriorating market liquidity because of trade war uncertainties, the immediate prospects of less capitalized oil market players come into question, Isaev says.
“For the less liquid names, there’s a considerable risk that bid-ask spreads may be widening, making such bets not worth the trouble,” he says.
Like Exxon, Chevron is a vertically integrated major oil and gas company and has the deep pockets needed to spend big to get into cleaner technologies, if pressure from its board, investors and the public can persuade it to do more than it already is doing.
That strategy would seem to make sense, as experts predict that oil and gas will continue to be in demand for decades even as solar, wind and other projects such as hydrogen and carbon capture advance.
Source: By money.usnews.com