The oil industry hasn't been kind to dividend investors in recent years. Intense oil price volatility has impacted cash flow, forcing many producers to slash their dividends to stay afloat.
The volatility has also convinced the industry to reduce costs and shore up its finances, placing a growing number of oil-fueled dividends on a sustainable footing. The safest oil dividends right now are those paid by ConocoPhillips (NYSE: COP) and EOG Resources (NYSE: EOG).
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A cash flow machine
ConocoPhillips has spent several years reshaping its portfolio and paying down debt. That's helped reduce its cash flow breakeven level, so that with oil at $40 per barrel, it can fund the capital needed to maintain its production rate and its current dividend level with room to spare. At an average oil price of $50, it can generate $8 billion in free cash flow per year.
The company's ability to generate gobs of free cash flow gave it the confidence to increase its dividend by 7% to $0.46 per share each quarter earlier this year. It now yields 2.6%, about double the S&P 500's average.
ConocoPhillips is generating so much cash these days with oil prices in the $70s that it plans to return more money to shareholders above the dividend next year. Overall, ConocoPhillips sees the potential to return $7 billion to shareholders in 2022. That includes the base dividend, up to $3.5 billion in share repurchases, and up to $1 billion via a variable return of cash (VROC). It intends to pay this VROC quarterly, and recently declared the first return of $0.20 per share.
ConocoPhillips also features a cash-rich balance sheet (recently around $4 billion) and plans to sell $4 billion to $5 billion of non-core assets by 2023. It intends to use those proceeds to pay off additional debt, enhancing what's already one of the strongest balance sheets in the oil patch. The combination of debt reduction and share repurchases will put the company's dividend on an even firmer long-term foundation.
A rapidly rising sustainable dividend
EOG Resources also has a low-cost oil business. It only needed oil to average $36 a barrel this year to cover enough capital spending to maintain its production rate and its regular dividend. With oil prices rising, EOG increased its dividend twice this year (by 10% in February and another 82% in November). That pushed its yield up to 3.5%. EOG has delivered 22 years of stable or growing dividends, and has increased them at a 28% compound annual rate since 2016. It can fully fund the higher dividend rate and a maintenance capital program with oil at $40.
With crude oil prices currently in the $70s, EOG Resources is generating a gusher of free cash flow. It used some of that money to pay two sizable special dividends. In addition, it authorized up to $5 billion of share repurchases.
EOG has also been strengthening its already top-tier balance sheet. It repaid a $750 million bond upon maturity in February and ended the third quarter with $4.3 billion in cash. The oil company is also targeting $2 billion of debt reduction through 2023.
With future share repurchases reducing the share count and continued debt repayment shoring up an already strong balance sheet, EOG's dividend looks to be among the safest in the sector. Meanwhile, as with ConocoPhillips, investors can potentially collect special dividends during periods of high oil prices, adding to EOG's already attractive income stream.
Rock-solid options for income investors
ConocoPhillips and EOG Resources offer some of the safest dividends in the oil patch. Both companies have low operating costs, enabling them to generate a tremendous amount of free cash flow to support their above-average dividends. On top of that, they're using excess cash to enhance already strong balance sheets, repurchase stock, and pay special dividends. This combination of low operating costs and financial strength makes them stand out as great options for investors seeking an oil-fueled dividend.
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Matthew DiLallo owns ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
