If you are wondering where the price of oil is going or it is not too late to buy oil stocks we’re here to tell you that oil prices and the energy complex are going higher, much higher. We think WTI will go well over $130 per barrel and set a new all-time high. It will probably stay at those levels until Russian capacity is either brought back to the market or made up by us or OPEC.
We already know that OPEC isn’t going to pump more, they said so, and our energy policy is anti-energy so there is really no ceiling in sight for price action. The worst part of this out is that, historically, any time oil prices correct it is caused by or comes with a recession so there’s that to think about too. Regardless, what this means is windfall profits for the energy sector and there are some high-yielding stocks from which to choose.
The XLE (NYSE:XLE) alone is yielding over 3.2% at last glance and the distribution is going to increase as well. Many companies within the sector are well-known dividend increases and no few have a record for special dividends when those windfall profits start hitting the balance sheet. The only bad news we can give is that, if you target specific company’s within the XLE holdings you can increase your yield to an average of 4.75%, diversify your holdings, and capture the same gains in share prices, maybe more.
1. Exxon Mobil
At first glance, the top three holding in the XLE offers at least two choices but only one pans out, Exxon Mobil (NYSE:XOM). Exxon Mobil is the world’s 4th largest energy company after Aramco (SE:2222) and two Chinese operations making it the largest energy company we want anything to do with. The stock yields over 4.3% and has a very positive outlook for dividend increases. The company is paying out about 63% of its earnings with oil prices approaching record highs.
Production levels may fall (probably not, demand is still on the rise) but we see margins widening and dividend health improving. The company also has a good track record of increases having only ever raised the dividend. The increases were paused during the peak of the pandemic but have recently been reinstated if at a low 1.1% rate. Looking forward, we expect to see Exxon Mobil continue to pay and increase its dividend as well as buy back stock.
2. The Williams Companies
Oddly enough, the stocks in XLE positions 2-7 are the lowest yielding in the group, numbers 8 and 9, however, put Exxon Mobil to shame. Williams Companies (NYSE:WMB), an oil and gas infrastructure play centered in the U.S., is the highest yielding stock in the group and is well-positioned within the industry.
The company operates as an oil and gas handling and pipeline company with a yield of 5.2%. A look at the revenue and earnings history shows no impact from the pandemic and only sustained growth to record highs. In our view, growth should continue for the foreseeable future and we expect margin expansion as well. Turning to the dividend history, that is a bit choppy but shows sustained distribution increases in tandem with oil price increases so there is a tailwind.
3. Valero Energy
Valero Energy (NYSE:VLO) is a refining stock with a 4.75% yield and a history of sustained dividend increases. The company’s revenue and earnings took a hit during the pandemic due to the massive decrease in demand for fuels but that situation has changed. Lately, revenue and earnings are outpacing the Marketbeat.com consensus estimates and we don’t think that trend will end.
