In 2023, the energy sector has shifted noticeably lower. Following gains of over 54% in 2021 and 65% in 2022, the performance of the S&P 500 energy sector ($SREN) this year has been largely negative, and the sector is currently off 5% for 2023.
This downturn is primarily due to lower oil prices; amid lingering concerns around global energy demand and potential oversupply, January-dated crude futures (CLF24) recently dipped below $70 per barrel before recovering.
The performance of oil and gas stocks is often closely tied to underlying commodity prices, which can add some unexpected volatility for investors - particularly around geopolitical developments that can influence prices, such as the ongoing Israel-Hamas conflict. However, energy companies, and particularly those in the oil and gas industry, have historically been known for offering attractive dividend yields, which makes them a favorite among income investors.
That's because energy companies - and especially the larger, more established ones - often generate significant cash flow from their operations. This allows them to pay out a portion of their profits in the form of consistent dividends to shareholders. Additionally, the energy sector is characterized by capital-intensive projects with long life spans, which can lead to steady, predictable revenue streams - further supporting their ability to pay dividends.
With many high-quality energy names now trading at a discount, here's a look at three dividend-paying stocks in the sector that are highly rated by analysts, and worth considering at current levels.
Marathon Petroleum
Marathon Petroleum Corporation (MPC), headquartered in Findlay, Ohio, operates the largest refining system in the U.S., with 2.9 million bpd capacity across 13 refineries. The downstream energy company focuses on refining, marketing, and transporting petroleum products and has a wide network of branded locations, including Marathon retail outlets. Initially established as a subsidiary of the upstream-focused Marathon Oil (MRO), Marathon Petroleum was spun off as a separate entity in 2011, and also maintains a stake in midstream operations, primarily via MPLX LP (MPLX).
Marathon Petroleum stock is up 31.6% this year, compared to a flat performance for the S&P 500 Energy Sector SPDR (XLE). However, MPC still looks attractively priced at current levels. MPC is priced at 6.35 times forward earnings, compared to the energy sector median of 10.29. Plus, the price/sales multiple of 0.37 is also compelling relative to its sector peers.
Most recently, the energy company reported third-quarter financial results which exceeded expectations. It reported earnings per share of $8.14, exceeding the consensus estimate of $7.79. Quarterly revenue was $41.58 billion, surpassing the forecast of $38.97 billion.
Turning to the balance sheet, cash and short-term investments were $13.06 billion, an increase of 17.25%. Total liabilities rose 2.24% to $57.17 billion, while free cash flow topped $4 billion.
The downstream energy company distributes a quarterly dividend of $0.83 per share, resulting in a forward yield of 2.25%. The dividend amount was most recently increased in October, and is backed by a low payout ratio of 11.7%, leaving room for further increases.
Among analysts, Marathon Petroleum has a mean target price of $159.67, implying expected upside of 6.8% from current levels. The consensus rating among 16 analysts tracking MPC is a “Moderate Buy,” with 10 analysts calling it a “Strong Buy,” 1 “Moderate Buy” rating, and 5 “Holds.”
Petroleo Brasileiro S.A.
Petrobras, more formally known as Petróleo Brasileiro S.A. (PBR), is a state-controlled Brazilian oil major. Founded in 1953 and headquartered in Rio de Janeiro, it is one of the world's largest oil producers, and majority owned by the federal government. The company specializes in the exploration, production, refining, and sale of oil and natural gas, primarily in deep and ultra-deep waters - including the development of Brazil's substantial offshore pre-salt oil reserves.
The U.S.-traded shares of PBR have outperformed considerably this year, up 63.9% since the start of 2023. However, the stock still looks like a good value right now.
Specifically, PBR trades at a forward price/earnings ratio of 3.82, and forward price/sales of 0.89. Both metrics represent a discount to the sector median for energy stocks.
From a dividend standpoint, the Brazilian energy giant distributes $0.37 to shareholders quarterly, resulting in a healthy forward yield of 10%. With a low payout ratio, PBR has room to keep growing its dividend payments.
Wall Street analysts have an average rating of “Moderate Buy” for PBR, and this group expects more upside for the stock going forward - the average price target of $16.71 represents a premium of nearly 10% from current levels. As a result, Petrobras, at its current valuation, continues to be an appealing option for investors seeking robust cash returns through dividends and the prospect of growth in share value.
BP
London-based BP (BP) is a globally recognized oil and gas company, best-known for its operations in exploration, refining, and marketing of oil and gas. BP also has a growing presence in renewable energy initiatives, with a stated goal of achieving carbon neutrality by 2050.
U.S.-traded shares of BP have added 7% so far this year - lagging the broader stock market, but still outperforming the energy sector. Plus, the stock is attractively priced relative to its sector peers right now, based on its forward p/e of 5.72 and p/s of 0.44.
In its latest quarterly report, BP's EPS fell short of analysts' expectations, coming in at $1.15 compared to the predicted $1.37. Revenue also lagged behind forecasts, with BP reporting $53.27 billion against the expected $56.66 billion. Losses were negatively impacted by weakness in natural gas prices, along with writedowns on its offshore wind power projects in New York.
Turning to the balance sheet, total liabilities decreased by 8.37% to $192.56 billion, while cash and short-term investments grew by 4.24%, totaling $30.86 billion.
Along with its share buyback program, BP offers shareholders a quarterly dividend of $0.44, which translates to a dividend yield of nearly 5%. The payout ratio is 29%, leaving room for growth in the years ahead.
Analysts have an average rating of “Moderate Buy” for BP, with 6 “Strong Buys,” 2 “Moderate Buys,” 5 “Holds,” and 1 “Strong Sell.” The average 12-month price target stands at $43.94, implying expected upside of 22% from current levels.
