1 Oil Stock With a Great Dividend That May Take Off

With the oil sector beginning to turn around, Akita Drilling Ltd. (TSX:AKT.A)(TSX:AKT.B), with its excellent dividend, solid balance sheet, and improving financials may be priced to buy.

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The oil sector might be finally staging a long-awaited turnaround. Oil prices are up, and companies’ financials are beginning to strengthen after long and painful consolidations. The downturn took its toll on many companies in the sector, including the producers themselves, energy service companies, and the drillers.

It makes sense that the drillers would have a hard time. After all, with prices so low, oil companies needed to preserve capital and focus on their core assets that were already producing. As oil prices rise, however, these companies once again will need to kick-start exploration, so they are prepared to capitalize on more profitable commodity prices. In the new age of exploration, drillers will be ready to provide their services

Akita Drilling Ltd. (TSX:AKT.A)(TSX:AKT.B) primarily operates in Canada with some operations in the United States. Akita is less diversified by region and business than others in the space. Its dividend and strong balance sheet, though, provide an interesting case for investing in Akita. Buying the company may represent a strategic way to be positioned to profit from a sector turnaround, while continuing to collect an excellent dividend along the way.

Higher oil prices have made a considerable impact on Akita’s financials over the past year. While earnings were still negative, the loss has narrowed significantly from 2017, up 62% from the previous year. Fund flows from operations were up 150%, mainly attributable to the rise in oil prices and the corresponding increase in demand for rigs. Net cash decreased primarily due to Akita’s U.S. expansion project, though the expansion could begin to provide the geographic diversity it currently lacks.

Akita pays a dividend of over 6% at current prices. While the dividend growth has been on pause for several years, the company has not cut the dividend. Considering the rise in oil prices and the company’s increasing profitability, it is unlikely it will cut it now. Akita is also mostly debt-free, further strengthening the case that the dividend will remain in place for the foreseeable future.

While the dividend is attractive, and the potential upside is on the horizon, it is important to keep in mind some risks before buying the stock. This company is smaller by market capitalization than others in the space, such as Precision Drilling Corp. (TSX:PD)(NYSE:PDS) and is not as diversified by geography. Akita is also not very diversified by business; as such it is more exposed to downturns in drilling activity.

Even though these concerns are important, Akita remains an interesting way to play the oil sector recovery. While I would never suggest that a commodity company’s dividend is completely secure, Akita’s improving financials, strong balance sheet, and the fact that it didn’t cut its dividend at the depths of the oil downturn suggest it is somewhat secure.

Oil remains somewhat out of favour, but it appears that time may be ending soon. Buying a company like Akita may allow investors to participate in any upside move and get a generous dividend while waiting for that upside to play out.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kris Knutson has no position in any of the stocks mentioned.

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