With interest rates still close to record-low levels, and major market benchmarks seemingly bumping up near all-time highs on a daily basis, there are fewer places where income-focused investors can find a compelling yield these days. That said, one place that still offers a generous income stream is the oil and gas sector. While there's an added risk associated with the industry due to its ties to volatile oil prices, there are several lower-risk options that can provide investors with plenty of income. Here are five top ideas that all yield more than 3%.
The big dog in oil-field services
Schlumberger is the world's largest oil-field services company. That scale is important because it enabled the services giant to leverage its global operations during the oil market downturn and squeeze out costs so that it remained profitable at a time when smaller competitors were losing money. In fact, Schlumberger generated a whopping $2.5 billion of free cash flow last year, which was almost enough to cover its dividend. While the company did have to dip into its cash position a bit, it still had $7.4 billion in cash on its balance sheet at the end of the first quarter, giving it plenty of cushion in the turbulent market. Because of that cash cushion and cash flow, Schlumberger has the financial strength to maintain its dividend while it waits for market conditions to improve.
Keeping up its aristocratic ways
Oil giant Chevron generates a boatload of cash flow each year. In fact, last year the company produced $12.8 billion in cash flow from operations despite turbulent oil prices. Because of that cash flow, and its top-tier balance sheet, Chevron was able to increase its dividend once again last year, marking the 29th straight year it raised the payout, enabling it to keep its title of Dividend Aristocrat. Meanwhile, with several large growth projects starting up in the near term, Chevron's cash flow should expand even if oil prices flatten out, which positions the company to continue paying a growing dividend in the coming years.
Focused on returning capital to shareholders
Leading independent refiner Valero Energy paid its investors $1.1 billion in dividends last year despite a challenging year for the refining sector. In fact, the company fully covered that dividend since it generated $4.8 billion in cash flow from operating activities. It used the remaining money to buy back $1.3 billion in stock and reinvested $2 billion into maintaining and expanding its business. Meanwhile, with a strong balance sheet and a balanced approach to capital allocation, Valero remains positioned to continue growing its dividend and has already increased it 17% for 2017.
A high yield with room to grow
Unlike the others on this list, pipeline and processing company MPLX generates very predictable cash flow since fee-based contracts support 95% of its earnings. Because of that stability, and the fact that MPLX has a healthy distribution coverage ratio of 1.3 in the first quarter, and an excellent balance sheet backed with a low leverage ratio of 4.0 times debt to EBITDA, it has the financial strength to sustain its distribution over the long term. In fact, thanks to several growth initiatives currently underway, MPLX expects to deliver 12% to 15% distribution growth in 2017 and double-digit growth next year.
Getting back on its feet so it can begin to grow
Plains All American Pipeline shares many similarities with MPLX, though it's not on quite as secure a financial footing since it won't completely cover its payout this year and it has a higher debt-to-EBITDA ratio of 4.8. That said, thanks to a repositioning transaction with its parent company last year, its financial metrics should strengthen over the next year after it completes a slew of growth projects. The growth from these expansion projects should fuel 17% earnings growth next year and as much as a 33% increase in profitability over the next several years. That growing earnings stream will further stabilize Plains All American Pipeline's financial metrics, which should eventually put it in the position where it can start increasing its already very generous payout.
All five of these companies share one thing in common: Each generates healthy cash flow despite operating in the volatile energy sector. For Schlumberger, Chevron, and Valero, the key to their ability to produce such robust cash flow stems from their large-scale operations, which enables them to keep a lid on costs. MPLX and Plains All American Pipeline, on the other hand, generate gobs of cash flow by collecting stable fees as they process, transport, and store oil and gas. Because these companies generate so much cash flow, they have ample left over to pay a generous dividend at a time when it's tough for investors to find a compelling yield.
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