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We can all speculate where oil prices are headed, but none of us knows. Oil at $80/barrel might lie just over the horizon, but so might oil at $30/barrel. I think the former is more likely, but that’s just me.
At this point, I’m sure many income investors would appreciate a little income predictability from their oil investments. Are there oil investments that can provide consistent income through thick and thin? The only way to gauge which investment can is to see which has.
The following two oil investments have and I believe will maintain their payouts.
Despite all the woes associated with lower oil prices, Calumet Specialty Partners’ (NASDAQ: CLMT) unit price is up 21%. Despite the price gain, the units still yield 10% based on Calumet’s $2.74 annual distribution, which has been maintained for the past two years.
The question is this: Is Calumet’s high-yield payout sustainable? I think so.
Calumet is a major oil refiner with facilities across the country. Refineries struggled through 2014 due to falling margins on the crack spread – the spread between the cost of oil and the products that are refined from oil.
The good news is that crack spreads improved in the second half of 2014. Calumet experienced significant improvement in gross operating margins. Some of the improvement was attributable to Calumet’s growing specialty products, of which there are 6,700. These are unique waxes, lubricants, and synthetic oils that are difficult to replicate by competitors.
In recent investor presentations, Calumet management has hinted that it has the financial wherewithal to maintain its distribution. Specifically, it has $565 million in cash and revolving financing. Distributable cash flow has improved to easily cover the distribution at 1.4 times the payout.
Of course, there are no guarantees, but Calumet is an enticing high-yield bet in this low-yield, low-oil-priced market
Size frequently confers strength. BP PLC (NYSE: BP) certainly is big, generating nearly $380 billion in annual revenue. That said, investors aren’t conflating BP’s size with strength. BP’s share price has fallen 18% over the past 12 months. Most of the decline occurred in the second half of 2014.
Falling oil prices have obviously weighed on BP’s shares, but that’s been the case with all the major oil companies. BP has been additionally saddled with a $18 billion fine related to a 2010 Gulf of Mexico oil spill.
Fortunately, the fine was recently reduced to $13.7 billion. BP shares popped nearly 6% on the news. To be sure, $13.7 billion is a lot of money, but it’s an amount BP can handle without jeopardizing its dividend. What’s more, I would not be surprised to see the fine reduced further still.
BP pays $2.40 per share in annual dividends. This is the highest yield – at 5.8% – among the integrated oil giants. Yes, low oil prices have income investors worried, but they can take solace in history. In the low-priced oil epoch of the 1990s, where oil prices fluctuated between $20/barrel and $40/barrel, BP continually raised its payout.
Today, BP offers the highest yield among the oil majors. It also offers the greatest potential for share-price appreciation. Heightened uncertainty weighs on BP’s share price. When the weight begins to lessen, the share price will begin to rise. It will also likely rise more dramatically than its large-bodied competitors’ shares.
Saudi Arabia’s Plot Backfires!
When the Saudis announced they would not cut production to bolster oil prices, the intent was obvious. The move was meant to drive down crude prices, and punish the U.S. oil industry. The US had already over taken both Saudi Arabia and Russia in crude production – and the Arabs thought they could stop it with this move. WRONG! And we’ve found a great way for the average guy to cash in.