After the last few years we have had, the oil and gas sector is a great place to find value. What’s even better is finding stocks with super juicy dividends that look to be stable. When you hear that a company in the oil and gas sector has a dividend above 9%, it may seem too good to be true.
It may seem like these companies in this article will most likely have to cut their dividends, but that’s not necessarily true. Careful financial management Combined with a decent balance between sustainability and investment have put these companies in the best position possible to be able to continue to pay dividends.
On top of that, they both offer tremendous opportunities for growth, which has made these two companies some of the top stocks in the sector.
Torc Oil and Gas
Torc Oil and Gas is a medium-sized exploration and production company. For the current year, it’s targeting production of around 28,000 barrels of oil equivalent per day (BOEPD), 88% of which is oil and NGLs.
The company is a top stock, as evidenced by the 28% stake owned by the Canada Pension Plan Investment Board.
Currently, it has an annual decline rate of just 23%. Torc estimates that the annual production decline will be around 6,500 BOEPD.
The dividend is a very attractive feature for investors. It pays out $0.025 a month and $0.30 annually. Currently, it yields over 9.5%, but it seems to be sustainable. The company only needs $46 million annually for dividend payments.
This means the dividend is sustainable as long as WTI stays over $50. In addition, the company hedges up to 60% of its volumes. For comparison sake, in 2018, the company had a payout ratio of only 76%.
It had just $364 million net debt at end of the second quarter. Furthermore, it has a capital plan of $180 million this year — a conservative figure that gives it the perfect balance between sustainability and balance sheet preservation.
Freehold Royalties is a leading oil and gas royalty company. It’s always a top name for income investors as the dividend is usually quite attractive.
It owns land predominantly in Alberta and Saskatchewan but also in Manitoba and North Dakota. Freehold’s land ownership is quite sizable with 10% of industry drilling in Western Canada on its land.
It has good financial strength with mitigated risk. Its operating netback is $35 per barrel of oil equivalent (BOE). The cash costs per BOE are extremely low at just $5.25. It also reported an operating margin of 98%.
It estimates that 89% of this year’s revenue will come from oil and NGLs.
Currently, the dividend yields over 9% at the time of writing. Freehold has increased the dividend two of last three years and has set a long-term target payout ratio between 60% and 80%. It expects this year’s payout ratio to be near the 60% mark.
The company has had prudent debt management with net debt to funds from operations (FFO) targeted for 1.5 times; however, for the trailing 12 months ending June 30, net debt to FFO has been just 0.9 times.
Freehold is one of the best stocks to own in the oil and gas sector. Its structure makes it risk adverse and more stable, yet it still has high leverage to the price of oil. The stock is definitely a buy around $7, and investors should scoop up that 9% dividend while it lasts.
Both stocks are well managed for the long term and offer investors dividends that are hard to pass up. In the oil and gas sector, no dividend’s sustainability is 100% guaranteed, but these two stocks come awfully close.