As we enter the first full week of August amid heavy selling in global markets, investors are increasingly eyeing the energy sector for dividend-paying stocks that offer both stability and growth potential. The energy landscape, encompassing upstream to downstream operations, continues to present attractive investment opportunities, particularly for those seeking reliable income streams through dividends. In this article, we focus on three standout energy dividend stocks: Enterprise Products Partners (EPD), Valero Energy Corporation (VLO), and Occidental Petroleum Corporation (OXY). These companies not only offer consistent dividend payouts but also have consensus “Buy” ratings from analysts, with healthy upside potential to their mean price targets.
Oil prices have declined for a fourth straight week, impacted by a weaker-than-expected U.S. employment report and concerns about the Chinese economy, which have overshadowed positive U.S. inventory data and rising geopolitical risks in the Middle East. However, with the Federal Reserve set to cut rates in September, the U.S. dollar may remain weak - a factor that could support higher oil prices. Moreover, lower interest rates typically boost economic growth and increase oil demand.
As for now, let’s delve into the financial health, market position, valuation, growth prospects, and dividend sustainability of EPD, VLO, and OXY. Whether you are looking to enhance your portfolio’s income potential or capitalize on the growth opportunities in the energy sector, these three stocks are worth considering for your investment strategy this August.
1. Enterprise Products Partners LP
With a market capitalization of $61.85 billion, Enterprise Products Partners LP (EPD) is a leading midstream energy company strategically based in Texas close to low-cost basins. It possesses critical infrastructure assets, such as pipelines and storage facilities, essential for the transportation and storage of hydrocarbons. These assets are backed by long-term contracts and fee-based revenues, allowing the company to produce steady and increasing earnings.
Shares of Enterprise Products Partners LP have gained 5.6% on a year-to-date basis, compared to a more than 12% gain for the S&P 500 Index ($SPX).
On Aug. 1, Wells Fargo analyst Michael Blum increased the firm's price target on Enterprise Products to $35 from $33, adjusted the base year in the valuation models to 2026, and maintained an “Overweight” rating on the shares.
On July 30, Enterprise Products Partners announced plans to proceed with an expansion project along the Houston Ship Channel, driven by sustained robust customer demand for natural gas liquids (NGLs) export capacity. The company said it will enhance refrigeration capacity at the Enterprise Hydrocarbons Terminal to boost propane and butane export capabilities by approximately 300,000 barrels per day. Enterprise stated that the expansion will not only provide additional capacity for liquefied petroleum gas, but also increase the instantaneous loading rates for propane and butane, and make more capacity available for propylene exports. The expanded service is expected to begin by the end of 2026.
Enterprise Products Partners has a consistent dividend history. On July 11, the company declared a quarterly cash dividend of $0.525 per share, which represents a 1.9% increase from the previous dividend of $0.515, to be paid to shareholders on Aug. 14. EPD’s annualized dividend of $2.10 results in a forward yield of 7.37%, markedly above the sector’s median yield of 4.28%. Notably, it has increased its dividend for 25 consecutive years, far exceeding the sector median of 1.1 years.
The company also bought back $40 million of its common units in the open market during the second quarter of 2024. Including these purchases, the partnership has now used 50% of its authorized $2.0 billion buyback program.
Enterprise reported its financial results for the second quarter of fiscal 2024 on July 30. Overall, the company reported another strong quarter, with all key metrics surpassing the levels seen in the same quarter a year ago. EPD’s total revenue surged 26.6% year-over-year to $13.5 billion during the quarter, fueled by strong performance across the business. However, the figure fell $790 million short of analysts’ consensus.
Additionally, Enterprise reported a net income attributable to common unitholders of $1.4 billion, or $0.64 per unit on a fully diluted basis, for the quarter, marking a 12% increase from $1.3 billion, or $0.57 per unit on a fully diluted basis, in the second quarter of 2023. Again, the bottom line missed consensus estimates by just $0.01.
Notably, Co-CEO Jim Teague highlighted in his opening remarks during the earnings call that the second quarter is typically EPD's seasonally weakest quarter. Despite this, the company still processed approximately 12.6 million barrels per day of crude oil (CLU24) and about 2.2 million barrels a day of marine terminal volumes, both nearing record levels. Additionally, on the NGL pipeline and fractionation volume front, EPD achieved a new record.
As a result, Enterprise’s adjusted EBITDA increased by 10% year-over-year to nearly $2.4 billion during the second quarter. Similarly, distributable cash flow, a more accurate indicator of cash generation, reached $1.8 billion, showing an increase of approximately 4.5% compared to the same period last year.
Encouragingly, the company’s growth is poised to continue in the coming quarters and years. EPD currently has $6.7 billion worth of projects under construction.
EPD’s balance sheet is notably strong. As of June 30, the company maintained a trailing 12-month leverage ratio of 3x, well within its target range of 2.75x to 3.25x. Moreover, it had $3.4 billion in available credit capacity and unrestricted cash.
Analysts tracking the company predict a 7.51% year-over-year increase in its earnings to $2.72 per share for fiscal 2024. Also, Wall Street expects EPD’s revenue to grow 13.39% year-over-year to $56.37 billion in fiscal 2024.
In terms of valuation, priced at 10.58 times forward earnings, the stock trades at a moderate discount compared to the sector median of 11.32x. Also, the company’s forward EV/EBITDA ratio is 9.33x, above the sector median of 5.90x, yet nearly aligns with its own five-year average of 9.50x.
Analysts have a consensus rating of “Strong Buy” on Enterprise Products Partners stock, with a mean target price of $33.29, which indicates an upside potential of about 17% from the stock’s Friday close. Out of the 16 analysts offering recommendations for the stock, 12 analysts recommend a “Strong Buy,” two advise a “Moderate Buy” rating, and the remaining two recommend a “Hold.”
2. Valero Energy Corporation
Valero Energy Corporation (VLO), valued at $47.60 billion, is a refining company with operations in the U.S., Canada, and the UK. Operating across these regions, VLO manages 15 refineries that process a variety of crude oils and assorted feedstocks. These processes yield a variety of end products, most notably transportation fuels, low-sulfur fuel oil, and heating oil.
Shares of Valero Energy Corporation have climbed 9.2% on a year-to-date basis, lagging the S&P 500 Index’s gain over the same period.
On July 17, Wolfe Research analyst Doug Leggate reinstated coverage of Valero with an “Outperform” rating and a $177 price target. The firm is adopting a “defensive” stance as oil prices are anticipated to stay around $85, influenced by paper markets challenging OPEC+ policy. Conversely, for U.S. gas, a contango curve suggests a structural shift that could reverse a decade-long decline in the marginal cost of supply, the analyst explained in a research note to investors. Wolfe added that it views E&Ps as having the best collective risk/reward in the sector.
Separately, Mizuho upgraded Valero to “Outperform” from “Neutral” with a price target of $175, up from $165. Among the large-cap names, Valero provides the best exposure to key sector themes, including significant exposure to U.S. coastal markets, complexity to modify crude diet, high yields of gasoline and low secondary products, and historically high utilization rates indicative of robust operations, Mizuho analyst told investors in a research note. The firm argues that the stock is trading at a discount compared to its large-cap peers, while also offering greater potential upside in terms of net asset value.
Valero Energy has a long history of paying dividends. The company boasts a track record of paying dividends for 26 consecutive years, exceeding the sector median of 3.2 years. On July 18, Valero Energy declared a quarterly cash dividend of $1.07 per share, in line with the previous, payable to its shareholders on Sept. 3. Its annualized dividend of $4.28 per share translates to a 2.88% forward yield, which is below the sector median of 4.26%. Notably, the company has a dividend payout ratio of 23.79%. While the payout ratio remains quite low, the company opts not to aggressively increase its dividend, primarily utilizing buybacks to distribute excess cash instead.
During the second quarter, the company returned $1.4 billion to shareholders via dividends and stock buybacks, achieving a total payout ratio of 87%. Over the last decade, Valero has repurchased nearly 40% of its shares, positioning it as one of the most aggressive buyback practitioners in the stock market.
Valero Energy reported its second-quarter earnings results on July 25. The company posted net income of $880 million, or $2.71 per share, beating expectations by $0.11. Although this represents a decrease from $1.9 billion and $5.40 per share in the same quarter last year, respectively, the figures are still notably high. Its total revenue was essentially flat year-over-year at $34.49 billion, aligning with Wall Street’s expectations. It is also important to note that Valero reached a 94% utilization rate, demonstrating the strength of its wholesale system in the second quarter, with sales exceeding 1 million barrels per day.
The Refining segment recorded an operating income of $1.2 billion in Q2, a decrease from $2.4 billion in the second quarter of the previous year. Throughput volumes averaged 3 million barrels per day. The Renewable Diesel segment reported operating income of $112 million, significantly down from $440 million in the same quarter of the previous year. Sales volumes averaged 3.5 million gallons per day, impacted by planned maintenance that resulted in a reduction of over 900,000 barrels in daily production. The Ethanol segment recorded an operating income of $105 million, down from $127 million in the previous year. Production volumes rose by 31,000 gallons to 4.5 million gallons per day, with pricing presenting the most significant challenge.
Management also noted that completing the Diamond Green Diesel sustainable aviation fuel project in the fourth quarter will position it as one of the largest manufacturers of sustainable aviation fuel worldwide.
Valero Energy has a healthy balance sheet. Overall, the company maintains a debt-to-capitalization ratio of 16%, with total debt at $8.4 billion, finance lease obligations at $2.4 billion, and cash and cash equivalents at $5.2 billion.
Analysts tracking the company expect a 47.55% year-over-year decrease in its profit to $13.06 per share for fiscal 2024, alongside an anticipated 6.21% year-over-year reduction in revenue to $135.78 billion.
In terms of valuation, the stock is trading at 12.39 times forward earnings, aligning closely with the sector median of 11.28x. However, with a five-year average P/E ratio of 47.87x, VLO may currently be undervalued. On a forward EV/EBITDA basis, the stock also appears undervalued compared to its peers and its own five-year average multiple. Valero is trading at 6.78x, below its five-year average of 8.98x, while its peer Phillips 66 (PSX) is trading at 8.72x. This suggests the potential for additional upside.
Overall, analysts have deemed Valero Energy stock a “Strong Buy,” with a mean target price of $172.29, indicating an upside potential of about 16% from Friday’s closing price. Out of the 17 analysts covering the stock, 14 recommend a “Strong Buy,” two suggest a “Hold,” and one has a “Strong Sell” rating.
3. Occidental Petroleum Corporation
Founded in 1920 and headquartered in Texas, Occidental Petroleum Corporation (OXY) is a global energy firm with operations spanning the U.S., Middle East, and North Africa. It ranks among the largest oil and gas producers in the U.S., with a strong presence in the Permian and DJ basins, as well as the offshore Gulf of Mexico. The company’s market cap currently stands at $52.22 billion.
Shares of Occidental Petroleum have dropped 7.5% on a year-to-date basis, lagging behind SPX’s gain over the same time frame.
On July 29, Permian Resources announced that it had agreed to acquire 27,500 net acres in the Barilla Draw field of the Delaware Basin in Texas and 2,000 net acres in the New Mexico Delaware Basin, which currently produce about 15,000 barrels of oil equivalent per day, from Occidental Petroleum for $817.5 million.
On July 17, Wolfe Research reinstated coverage of Occidental Petroleum with an “Outperform” rating and $81 price target, naming the stock its “Top Idea.”
On the dividend side, the company raised its quarterly dividend to $0.22 per share in May, bringing its annualized dividend to $0.88, which corresponds to a yield of 1.53%. Occidental Petroleum has consistently paid dividends for 34 consecutive years, far surpassing the sector median of 3.2 years. Notably, OXY has a moderate dividend payout ratio of 23.53%.
Securities and Exchange Commission filings from mid-June disclosed that Warren Buffett’s Berkshire Hathaway (BRK.B) raised its stake in OXY to nearly 29%, and now holds 255.3 million shares, which indicates strong confidence in the company’s management and strategic direction.
Occidental Petroleum released its most recent quarterly earnings report on May 7. The company benefited from strong operational performance, with teams excelling across oil and gas, OxyChem, midstream, and marketing segments. As a result, in the first quarter of 2024, total operational cash flow amounted to $2 billion, and cash flow before working capital changes was $2.4 billion.
The company reported a net income attributable to shareholders of $718 million, or $0.75 per share, and an adjusted income of $604 million, or $0.63 per diluted share. Notably, the bottom line topped consensus estimates by $0.06. OXY generated $1.2 billion in oil and gas pretax income, down from $1.6 billion in the fourth quarter, with the decline attributed to lower crude oil prices and domestic crude volumes. Average crude prices fell by approximately 4% during the quarter, averaging around $76 a barrel. Its first-quarter revenue decreased by 17.6% year-over-year to $5.98 billion, missing the consensus by $800 million.
Occidental Petroleum’s total average global production reached 1,172 thousand barrels of oil equivalent per day in the first quarter, aligning with the midpoint of its guidance and overcoming an extended third-party outage in the eastern Gulf of Mexico.
Additionally, Occidental announced that it had closed its acquisition of CrownRock, L.P. on Aug. 1. The company purchased CrownRock for $12 billion, increasing its inventory by 33% with a break-even of less than $40 per barrel and anticipating a boost in its output by 170,000 barrels of oil equivalent per day by 2024.
The company is set to report its Q2 earnings results after the market closes on Wednesday, Aug. 7. Analysts tracking OXY forecast a 12.97% year-over-year increase in earnings to $0.77 per share for the second quarter, with revenue anticipated to remain roughly unchanged from the previous year at $6.70 billion. For fiscal 2024, analysts expect the company’s earnings to decrease by 1.08% year-over-year to $3.66 per share.
In terms of valuation, the stock is currently trading at 16.06 times forward earnings, which is higher than the sector median of 11.28x, yet significantly below its own five-year average of 31.91x. Also, the company’s forward EV/EBITDA ratio stands at 5.58x, which falls below both the sector median of 5.89x and its own five-year average of 6.44x.
Analysts have a consensus rating of “Moderate Buy” on Occidental Petroleum stock. Out of the 21 analysts covering OXY, seven recommend a “Strong Buy,” 13 advise a “Hold,” and one has a “Strong Sell” rating. The mean target price for OXY stock is $71.95, which is about 25% above Friday’s closing price.
