Top oil stocks that you can count on

Author's Avatar
Mar 03, 2015

The crude oil and petroleum industry has indeed suffered a rude shock due to the continuous slump in oil prices. It was just about a year back that crude oil was trading at over $100 per barrel mark. Currently, this price is close to $50 per barrel, a drop by more than 50%. Many oil companies, especially those that had only upstream businesses to rely on, suffered a rough phase. Since earnings came down, these companies reduced their dividends, too, in order to cut costs. Two such oil companies that announced a reduction in their dividend pay-outs recently were Linn Energy (LINE, Financial) and Transocean (RIG, Financial).

Most reliable oil stocks

As an investor, these dividend cuts can impact your profits hugely. These announcements will also make you lose confidence in these stocks. This is where investors of integrated oil companies like Royal Dutch Shell (RDS.A, Financial) (RDS.B, Financial), Chevron (CVX, Financial) and British Petroleum (BP, Financial) has a definite edge over investors of other oil majors. An integrated function of working where upstream and downstream businesses co-existed was the main reason for success for these three companies. All the three are in a healthy financial position to pay out the same or more dividends to their investors in the future, irrespective of the turmoil building up in the oil sector currently. The average dividend yields of these companies are in the range of 4 to 6%.

What makes these companies tick?

How are these companies able to satisfy their investors when all their peers are struggling? What is it that makes them so reliable? It is nothing but their downstream business. Upstream relates to exploration and drilling businesses and downstream relates to refining businesses. When oil prices come down, upstream businesses suffer a lot. Downstream operations, on the other hand, get to improve because of the huge difference between the higher oil rates and the cost of refining. As the gap between these two prices gets bigger, it means the company gets to earn good profits. This is exactly what is happening in the operations of these three companies.

For the year 2014, the net profits of Shell fell by 8%, due to the huge slump in oil prices; however its downstream business grew at an impressive rate, and earning from this alone was at least 40% more than 2013. This success helped the company combat the losses it suffered through its upstream operations. Chevron reported net profits of just $19.2 billion (a drop of 10% from 2013) and an 18% reduction in profits from upstream businesses. However, the good news for investors and for the company was that earnings from its downstream operations improved by close to 100% stood at a good $4.3 billion for 2014. The case of British Petroleum was no different. The company reported a loss of $4.4 billion for Q4 2014 and earnings per share fell by 65% when compared to 2013. The only silver lining was that BP recorded a $32.8 billion operating cash flow from its downstream businesses, a good increase indeed from the $21.1 billion figure during 2013.

Future plans to cut costs

Interestingly, all the three oil majors have taken the same route to cut costs – cutting off capital expenditure. The management of all these companies believe that efficient management of capital costs can bring about lots of savings for their companies. Shell, for instance, has announced that it plans to cut its capital expenditure by $15 billion for the next three years. During 2014, it was also involved in a $15 billion worth sales of assets that didn’t have any potential to grow in the future. Chevron, while declaring its annual allocations, has recently announced that an amount of $35 billion would be set aside for capex purposes. This is 13% lesser than its allocations last year. BP has already clarified that its capex budget for 2015 would be lesser than 2014 numbers by at least $2.9 billion. During the year, it will also sell off non profitable assets worth $10 billion in order to cut costs.

Safe dividends

Due to all these above factors, the dividends of these three companies are quite safe. Investors can be assured of their returns with these companies. All three are taking the right moves to ensure that they have enough free cash flow at hand to pay off investors.

Conclusion

When you are intimidated by the crash in oil prices, these 3 stocks are the ones you need to turn to, to reassure yourself that the picture is not as bad as it seems to be. If you invest in these three companies, you can heave a sigh of relief as your money will be safe here, thanks to the excellent cost management initiatives that are already under way.