If you try investing in oil without doing your due diligence, don’t be surprised if you hit a dry well. In general, you will want to look at four things:
1. What does the company actually do?
2. How much money does the company owe?
3. How much profit does it generate?
4. What’s the dividend?
Pros and Cons of Buying Oil Stocks
The oil industry can be somewhat volatile, but the dividends often cushion share price swings.
For this reason among others, many companies in the oil industry offer dividends, which serve to help you earn a return on your investment while you wait for the share price to go up.
It also compensates you for the risk you take on when you open an oil position with a shorter horizon. However, you should not forget just how volatile this industry can be. Returns are not guaranteed.
Phillips 66 Stock – A Warren Buffett Favorite
The Houston-headquartered Phillips 66 [NYSE: PSX] has a 52-week range of $78.44 to $123.97.
Analysts give the company a one-year target estimate of $119.53. The current dividend yield is 3.4%.
Operations at PSX fall into four categories:
- Midstream
- Chemicals
- Refining
- Specialty
The Midstream segment includes the company’s efforts in the transportation and processing of crude oil, liquified petroleum gas (LPG), natural gas, and natural gas liquids (NGL).
It contains its investment in the Phillip 66 Partners LP and its 50% equity DCP Midstream investment.
Phillips [NYSE: PSX] had a strong 4Q18 and reported good earnings, but the results are a little skewed.
One of the reasons that PSX’s year-over-year performance looked so good was that the company received a $2.6 billion tax benefit in 2017. However, Phillips also posted a strong profit.
Its different segments grew too. Midstream was up 85% while Refining saw a 118% increase.
Then there is the matter of the company’s debt.
Phillips [NYSE: PSX] owes roughly $11.2 billion. While debt is a big part of being an oil company, most of these companies don’t perform well when they owe too much. Debt strangles access to new capital and chokes out profit with climbing interest expenses.
If Phillips [NYSE: PSX] cannot access adequate capital, it could be assigned to a similar fate. The company warns investors of this risk in its annual report.
Warren Buffett’s Berkshire Hathaway [NYSE: BRKA] used to own a good chunk of the company, but Buffett cut their stake to 4.8% from 7.5% in 2018. “This transaction was solely motivated by our desire to eliminate the regulatory requirements that come with ownership levels above 10 percent,” said Buffett. “We remain one of Phillips 66’s largest shareholders and plan to continue to hold the stock for the long term.”
Plains All American Pipeline Stock – High-Dividend
Plains All American Pipeline [NYSE: PAA] is a high-dividend oil stock. This company offers a 5.16% dividend yield. In the past year, the stock has gone as low as $19.34 and as high at $27.70.
Consensus estimates predict PAA will hit $27.91 by this time next year.
Plains All American [NYSE: PAA] is primarily involved in midstream operations. The company works in the logistics and infrastructure for crude oil, NGL, and natural gas products.
Its business activities fall into three segments:
- Facilities
- Supply
- Transportation
This company has a few notable strengths. For one, its assets are in well-established areas. It also owns a variety of pipelines, rails, trucks, and storage facilities. These assets allow Plains All American Pipeline [NYSE: PAA] to be operationally flexible.
Plains AA is also financially flexible.
The company’s total debt to capitalization is no higher than 60%, and that credit profile makes it easy to access credit as needed.
Since 1998, the company has completed almost 100 acquisitions. The purchase price of those investments is roughly $13.2 billion.
PAA also committed to a variety of capital projects for expansion. The value of these efforts totals around $12.6 billion.
It pays for more than half of these investments with equity and its own cash flow so only a small percentage needs to go through a lender.
Occidental Petroleum Stock – Oil producer
Occidental Petroleum [NYSE: OXY] offers an impressive 4.81% dividend yield. The company has a 52-week range of $56.83 to $87.67.
Analysts estimate that OXY will hit $80.33 within the next year.
OXY has been divesting its operations in lower margin areas like oil and gas production to fund activities with a projected higher return.
Right now, Occidental’s operations have three segments:
- Chemicals
- Midstream/Marketing
- Oil/Gas
OXY’s Chemical division, OxyChem, was top in the United States during 2017 for basic chemicals products like vinyl chloride monomer (VCM) and polyvinyl chloride (PVC).
The company hopes to retain the number one position by offering the lowest prices out there. In Midstream and Marketing, OXY supports its own oil and gas business while providing those same services for third-parties.
In this area, Occidental [NYSE: OXY] is trying to make sure that its pipeline and systems have a presence in a variety of markets and locations.
Within Oil and Gas, OXY is competing with a whole host of rivals. To remain competitive, the company has focused on strategic acquisitions and enhanced oil recovery (EOR) techniques.
OXY is in fair condition debt-wise. While it has just under $10 billion in debt, it also has strong cash reserves and good cash flow.
The ratio of its operating cash to total debt is less than 51%, which may be high for some industries, but it is not unusual for this company. By all measures, OXY looks like it can handle its short-term obligations and freely access new funding as needed.
Best Oil Stocks to Buy: The Bottom Line
The industry is highly-nuanced. There are many ways to invest, including oil commodities as well as master limited partnerships and oil ETFs. Plus, there are always oil stocks.
The problem is that every oil company is different. The products they sell, the locations of their oil assets, the volume of their oil assets, and more are all different. Evaluate each stock as well as your investing needs before you open a position.
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