Energy companies have struggled to make enough money during the latest downturn to cover their dividends. Investors are concerned that major oil companies like ExxonMobil (XOM) aren’t making enough to fund their dividends in a sustainable way.
But a few energy companies are still pumping out enough cash to fund those payouts without having to draw on their reserves or take on debt. That’s a good sign for investors who want some exposure to dividend-paying energy companies, but don’t want to stress about whether those companies will be able to keep paying dividends if oil prices stay low.
Barron’s screened for energy companies in the S&P 1500 that produced enough cash flow in the latest quarter to cover their dividend payments. We limited the search to those that produced positive net income in the quarter and have market caps over $1 billion. Three of the four companies that made the grade are so-called midstream companies that offer services to oil producers without having as much exposure to the price of commodities.
Kinder Morgan (KMI) is one of the most prominent midstream companies in the country, transporting oil and gas through 83,000 miles of pipelines, and storing and handling it at 147 terminals. The stock has begun to improve in recent weeks, though it’s still down about 30% this year. It has a dividend yield of 7.4%.
Equitrans Midstream (ETRN) operates natural gas pipelines in the Appalachian Basin area. Natural gas demand has held up better this year than oil demand, as a growing share of electricity generation is now provided by gas-fired plants. Equitrans should benefit if drilling activity improves in the months ahead.
World Fuel Services (INT) provides fuel for airlines, cruise lines and military units, among other customers. Its business has slumped during the pandemic, but the company has continued to produce strong cash flow, in part because the fuel it buys to service customers is cheap.
Archrock (AROC) compresses natural gas so that it can be transported more easily and efficiently. It’s paid through fees from customers, so it’s less exposed to changes in commodity prices. The company has been dramatically cutting its capital expenditure budget, and expects it to fall by 65% from 2019 once the year is done. “We’ve taken significant action to squeeze costs out of our business and our efforts have cut across all segments and all geographies,” said CEO D. Bradley Childers on the company’s latest earnings call.
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