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Investing in the energy sector can feel like walking through a minefield. Over the past two years, the price of oil has collapsed in the U.S., from over $100 per barrel at the 2014 peak, to $27 per barrel at the 2016 low.
As a result, investors have been burned in the energy sector. Fortunately, Big Oil giant Exxon Mobil (NYSE: XOM) is a pillar of stability through it all. The massive drop in commodity prices wreaked havoc for many oil and gas stocks, many of which have cut dividends to stay alive.
While the oil market is likely to remain challenged for some time, investors should stick with Exxon stock.
Exxon Stock: Best Pick Due to Flexibility
The reason why Exxon Mobil is the best pick of oil stocks is that it has the most financial flexibility to withstand the downturn. As the largest publicly-traded energy stock in the world, Exxon has been able to cut costs to stay profitable through the current crisis.
Exxon’s net profits are down 62% in the first half of the year, but relatively speaking, it is in much better shape than most in the energy sector. Exxon still earned $3.5 billion in net profit over the first two quarters of 2016, which has kept the company from having to sell off assets or cut its dividend.
A major boost to Exxon is its downstream business. As an integrated company, Exxon has a large refining unit in addition to its upstream exploration and production business. This is extremely valuable right now because refining profits tend to increase when oil prices decline, as a lower oil price reduces a refiner’s feedstock costs.
Exxon generated $825 million in downstream profits last quarter alone. Having the balanced, integrated structure is an advantage that independent exploration and production companies do not have right now, which is why so many in that area of the business are consistently losing money.
Exxon also has the strongest balance sheet of its peer group. It has the highest credit rating of the integrated super-majors, having only recently lost its ‘AAA’ credit rating, and it generates industry-leading returns on capital.
Its efficiency has allowed the company to reduce capital expenditures by $5.6 billion over the first half of the year.
And, Exxon’s profitability should improve going forward, even if oil prices stay where they are. That is because it has several major projects, including a massive liquefied natural gas project in Papua New Guinea, and its massive Kearl project in the Canadian Oil Sands, that are set to ramp up over the next year.
Once these projects ramp up, they will begin to generate cash flow, which should help Exxon’s future earnings growth.
Exxon Stock: Dividend is Secure
These are difficult times in the oil patch, which means investors need to tread carefully. Many oil and gas stocks, particularly in the upstream and MLP spaces, have cut or suspended their dividends over the past year.
A dividend cut, while painful by itself, is typically accompanied by a large drop in share price, which means it is even more important for investors to stick with the strongest companies in the energy sector.
That is why Exxon is the best pick of the group. Not only does Exxon stock have a high dividend yield ̶ currently 3.4%, well ahead of the S&P 500 average yield of 2% ̶ but Exxon is best equipped to raise its dividend going forward, thanks to its resilient profitability and strong balance sheet.
Exxon raised its dividend by 3% in 2016, which was its 34th consecutive year of dividend growth. It has paid uninterrupted dividends for more than a century, which is a testament to the company’s ability to successfully navigate the ups and downs of the oil business.
Exxon stock is not the highest-yielding dividend stock in the energy sector, but in this volatile climate, there is something to be said for quality. As oil threatens to drop back below $40 per barrel, investors should stick with Exxon stock, best-of-breed among Big Oil issues.