Going Global In Search Of Oil Dividends

By Todd Shriber | September 30, 2009 AAA

Investing in big oil explorers can be tricky. Stocks like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil explorers, don't seem to rise the way investors expect when crude oil futures are soaring, yet the share prices seem to mirror those of their underlying commodity as prices tumble. That's a frustrating scenario, but oil explorers like Chevron, ExxonMobil and ConocoPhillips (NYSE: COP) make up the core of the retail investor's energy holdings.

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That's not a bad thing. These companies are among Wall Street's most profitable when demand is high for crude oil, and that translates to some enormous stashes of free cash. Big chunks of free cash usually mean steady and reliable dividend payments, and U.S. oil explorers don't disappoint. In fact, ExxonMobil has been paying a dividend every year since 1882, and has increased the payout every year for the past 26 years.

In dollar terms, the payouts offered by the aforementioned trio are pretty solid and the yields are fair, but dividend seekers who want to include an oil explorer or two in their portfolios might do well to look beyond the borders of the U.S. Most investors know about BP (NYSE: BP), which does feature a robust yield and payout, so we're going to turn you on to two international oil explorers you may not be familiar with.

  • Eni Spa (NYSE:E)
    Annual Dividend: $3.68
    Dividend Yield: 7.1%

  • Total S.A. (NYSE:TOT)
    Annual Dividend: $3.23
    Dividend Yield: 5.5%

Will Breaking Up Be Hard to Do?
Eni is Italy's state-run oil company, but the company is involved in much more than just oil exploration. The company has interests in gas production and refining in addition to those businesses as they relate to oil, as well upstream engineering and downstream power supply and generation. Eni is a behemoth of a company and that has led Italy's energy regulatory body to suggest that it break up. At least one institutional investor seems to agree, saying the company might be able to unlock some shareholder value by breaking itself up into multiple pieces

But an Eni breakup isn't the reason to play this stock. For capital appreciation purposes, Eni offers some intrigue given its expansion into Africa, a market fraught with peril and potential. Eni recently passed on an acquisition of Tullow Oil of the U.K., but did acquire two significant offshore licenses in Ghana.

From an income perspective, Eni offers better than twice the annual payout of ExxonMobil at more than triple the yield. Eni's payout is nearly a dollar better than Chevron's at nearly twice the yield. That makes waiting for an Eni break a potentially profitable venture for dividend investors.

Total: French For Oil
France's Total is Europe's third-largest oil producer, but like Eni and its American rivals, the company has an eye toward international markets. With its second-quarter output sagging to a nine-year low, and crimped by weak demand, Total is just one of of the many majors looking to strike it rich in Brazil. And Brazil isn't the only foreign market Total is relying on to boost production in coming years. Projects in Angola, Kazakhstan and Nigeria are all expected to boost Total's bottom line over the next five years.

Production limits set by OPEC have hampered Total's output and that has the company taking a wait-and-see approach to major projects until next year. Total's breakeven point for the first half of 2009 was $60 per barrel and that is important to note if crude experiences a major pullback. However, Total has a balance sheet with $20 billion free cash, which should help the company weather any storms in the oil futures market.

The current market environment appears to prize copious amounts of free cash, either for the purposes of acquisitions or for maintaining dividends. Total's payout and yield are superior to those offered by its American rivals and with that big chunk of cash, the dividends appear to be safe.

Bottom Line: Two Ways To Play
Eni might be the more speculative play here and there are some analysts who believe the company could be a takeover target. Total is a tad less volatile than its Italian rival and that free cash flow is just too hard to ignore. (To learn more, check out our Oil And Gas Industry Primer.)

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