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Published: February 17, 2010
My friend Barbara phoned and invited me to
lunch a few weeks ago. When she offered to pay, I knew something
was up.
Barbara talked about her workout routine, her daughter's job
search, and her upcoming vacation to Panama. After asking me a
cursory question or two, she finally got to the point.
"I'm bullish on oil," she said. "Oil stocks have had great
recoveries in 2009. But I'm not sure about how much further
they'll go up this year." I nodded and waited for the punch
line.
"What I want is to find stocks that offer capital gains as oil
continues to rise, but also throw off high income while I wait.
I can't find oil stocks that offer the kind of yields I want.
I've checked."
Barbara is right. Most of the major oil producers like
ExxonMobil (NYSE: XOM) offer low yields. BP (NYSE: BP) is the
highest-yielding of the bunch, but its yield is still only 6%.
So if you're bullish on crude, where can you also find a high
yield?
Bullish Case for Oil
No doubt about it, the 2010 outlook for crude oil is positive.
Not wildly bullish, but constructive enough to make stocks in
this sector worth looking at.
According to a panel of 28 analysts polled by Forbes, crude will
average an estimated $75.40 per barrel in 2010, up from about
$60.90 per barrel in 2009. The analysts are hardly going out on
a limb, given that oil for February delivery is currently above
$75 per barrel.
But if the analysts are right, oil
companies will receive around +24% ($75.40/$60.90) more in 2010
versus 2009 for the same (unhedged) production volumes. Simply
by standing still and producing the same volumes, earnings
should rise. Companies with rising production should, in
general, fare even better.
But the Forbes consensus figure may be conservative. Earlier in
2009, Morgan Stanley forecasted an average oil price of $85 in
2010 and $95 in 2011. And Sanford C. Bernstein & Co. analysts
think we could see triple-digit oil prices by late 2010 or early
2011.
While few expect to see the $147 a barrel peak of July 2008 any
time soon, two big tailwinds are behind these bullish
projections.
Demand is increasing in emerging markets, like China, as the
global economy recovers. In the U.S., which together with China
consumes an estimated 33% of global oil, demand is also picking
up. Worldwide consumption is forecast to rise nearly 2% to 86.2
million barrels a day in 2010, according to a monthly report
from the International Energy Agency.
Also, a weak dollar should benefit oil, which is purchased as an
inflation hedge. The massive increase in debt issued by the U.S.
government has raised the specter of inflation, which could
continue to put upward pressure on commodities like gold and
oil.
Search for High-Yield Oil Plays
But as my friend Barbara pointed out, you simply can't find the
high yields by looking at the "majors." Even independent oil and
gas companies like Anadarko (NYSE: APC), Devon Energy (NYSE: DVN),
or Pioneer Natural Resources (NYSE: PXD) leave much to be
desired in the yield category.
But if the majors and larger independents aren't the place to
be, what about small and micro-cap stocks -- those with market
caps below $2 billion?
When I ran a small-cap screen, I struck pay dirt. I found
numerous oil and gas stocks with yields of 8%, 9%, 10% and
higher. Barbara's problem was solved. For example, MVO Oil
Trust (NYSE: MVO) pays a mouth-watering 9% and is expected
to grow earnings per share +20% this year -- not too shabby.
And the exciting thing is there are a number of similar
small-cap oil plays that will pay you a strong yield while also
benefiting from strong oil prices. In fact, I approached this
topic in a recent issue of High-Yield Investing, pinpointing
four small-cap oil plays that yielded up to 17%.
So if you're hunting for a way to lock in high yields from oil,
the key might be to simply think smaller.
Good Investing!
-- Carla Pasternak
Editor
High-Yield Investing
High-Yield International
Dividend Opportunities |
