MENU

Add This Monthly Dividend-Paying Energy Stock to Your Portfolio Today

Since 2014, dividend payments from many oil companies, particularly the smaller ones, have been looked at skeptically by dividend investors. Of course, there were good reasons for the skepticism, since several companies were forced to cut their dividends to strengthen their balance sheets, as cash flow dropped precipitously with falling oil prices.

After this prolonged period of negativity, Canadian energy stocks are finally beginning to show signs of strength. Most of the increased optimism towards these stocks rests on rising oil and gas prices. Rising prices lead to stronger cash flows, which, in turn, lead once again to more stable dividend payouts from mid-cap oil and gas companies.

With the return of higher prices, dividend opportunities in the sector are becoming more appealing once again. Peyto Exploration & Development Corp. (TSX:PEY) is one company that is well positioned to be an excellent dividend-paying stock in the oil and gas sector. Peyto derives approximately 79% of its revenue from natural gas, so it is a relatively pure play on the commodity.

Aside from benefiting from increasing commodity prices, Peyto is also positioned to benefit politically due to the fact that the majority of its operations are in natural gas. Many governments, including Canada’s, see natural gas as a “bridge” fuel, as they transition to a greater reliance on renewable energy. As a result, producers such as Peyto stand to benefit as the world moves towards cleaner energy sources.

The financial picture has been improving in general for Peyto. Revenues, earnings, and funds from operations have all been increasing. Over the past 19 years, Peyto has averaged a 30%-per-year return on equity. Peyto recently increased its funds from operations by 12% year over year. Management believes that these funds should be sufficient to continue to expand operations and maintain the current dividend.

The biggest issue with the balance sheet is the sizable debt that Peyto has on its books. A large debt load is not uncommon for commodity companies as they move through a low point in the cycle, since taking on debt to purchase discounted assets at a low point can be beneficial in the long run. The benefits do hinge, though, on the company’s commitment to pay down the debt as market conditions improve.

The downturn in commodity prices created a difficult earnings environment; Peyto has employed a number of strategies to counter the negative impact. The company currently uses currency and production hedges to stabilize earnings. It also has exceptionally long-life assets with low depletion rates that become more profitable with use, as a result of the lower capital expenditures needed to maintain the wells.

At current levels, Peyto could be a decent hold for the dividend investor. With increasing production, low decline rates, and increasing commodity prices, this stock looks set to move higher over the coming months.

However, it is important to remember that this is still a commodity stock and, as such, does not have the stable income that stocks in less volatile sectors, such as utilities or consumer staples, tend to have. But if you want to add monthly dividends to your portfolio with a stock that has the potential for price appreciation and a little sector diversification, then Peyto might be the stock for you.

Our expert just announced his #1 TSX energy play right now

Since 2013, The Motley Fool Canada's Iain Butler has more than doubled the return of the S&P/TSX index. It's a track record that should make you sit up and pay attention...

Especially when Iain announces a brand-new stock pick, like his #1 energy play right now. Hint: It's not another flash-in-the-pan E&P. It's actually a tech stock with deep ties to the energy industry - and Iain sees as much as 70% upside from today's price.

Now here's the really good news. You can snap up a copy of Iain's brand-new report for FREE. You'll get the name, ticker and the full investment case 100% gratis. In fact, the only catch is that you need to hurry! This report is hot off the presses today, but blink and you could miss it.

Click here to claim Iain's new report, absolutely FREE!

Fool contributor Kris Knutson has no position in the companies mentioned.

 

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.