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Home / Business / 3 High Dividend Shares Benefit from America's Energy Boom – EOG Resources, Inc. (NYSE: EOG)

3 High Dividend Shares Benefit from America's Energy Boom – EOG Resources, Inc. (NYSE: EOG)





(Source: imgflip)

I'm a big fan of dividend growth, and I'm investing primarily in first-class blue chips with strong secular growth winds that can bring strong cash flow and strong payoff growth to years or even decades.

Five years ago, I started my career as an analyst / investment writer at The Motley Fool, specializing in energy-dividend stocks. Therefore, I have closely monitored the global energy markets and the incredible increase in US shale oil and gas production.

In this article I would like to tell you why I am very optimistic about the oil and gas industry. I consider it a great sector from which investors can benefit from income growth in the coming years.

More importantly, I would like to highlight Exxon Mobil (XOM), EOG Resources (EOG) and TransCanada (TRP) as three great candidates for their diversified earnings growth portfolio.

Each is an industry blue chip that offers investors a variety of things, from a huge dividend growth rate to a very generous and steadily growing return to a solid and recession / commodity price insensitive cash flow.

Let's take a look at why I think the energy sector is so attractive right now, and why these three stocks are expected to generate big returns in the years to come, and are good to big today.

Why I'm So Bullish on US Energy

Regardless of what some people think, the demand for oil and gas will not diminish that fast. In fact, it is likely to continue to rise not only for the next few years but also for decades.



Source: IEA



(Source: XOM Investor Presentation)

This is due to a continued fast-growing world population, rapid economic growth in emerging markets, and the need to deliver base-load electricity (via natural gas power plants) the EV is feared by many to kill oil demand.



Source: EIA

For example, the US Energy Information Administration expects the share of natural gas in the total power generation market to actually increase slightly by 2050.

Leading global supply growth will be the US, whose market share is in the US Shale revolution has already made it the largest oil producer in the world, and the International Energy Agency expects to deliver 70% of crude oil growth over the next five years.





Source: IEA

And since US refineries were built to handle sour (higher sulfur) crude oil, US shale is low in sulfur (sweet). Oil exports will continue to rise rapidly, possibly leading America to the top Make crude oil exporter of the world.



Source: IEA

Many investors fear that the growing global focus on climate change will cause demand for oil and gas to fall off the beaten track over the next few years. In reality, oil prices should remain high over time, thanks to the natural decline in oil fields (5% to 6% per year). This means that even if the Paris climate targets are achieved, much more investment is needed to balance supply and demand.

Furthermore, no big country has come close to its Paris agreement promises, as Bjørn Lomborg recently highlighted in a great article.

The 2015 Paris Climate Agreement is a prime example of this. The countries have undertaken terrificly to keep the global temperature rise well below 2 ° C above the pre-industrial level, but all their promises together account for less than 1% of the demand . New analyzes show that only 17 countries – including Algeria and Samoa – actually fulfill their obligations in most cases because they promised very little . "- Bjørn Lomborg (emphasis added)

In fact, most of Paris's signatories, including the self-righteous and allegedly green EU, saw their CO2 emissions rise in 2017. The US was a leader in reducing CO2 emissions, thanks in no small part cheap shale gas Acceleration of coal shift to gas power plants.

In 2017, US per capita CO2 emissions reached an annual low of 67. This is due to the rise in shale gas, which has led to environmentalists and politicians cruelly working to stop spending much greater investment in new production and midstream infrastructure, energy prices are likely to rise much higher.



(Source: XOM Investor Presentation)

According to the IEA's latest five-year forecast In 2040, the World Expects $ 21 Billion to Invest in New Oil and Gas Supplies, ie e amounts to over half a trillion barrels of crude oil and 2.1 trillion cubic feet of gas. Even if the world is to deal seriously with climate change (which it objectively never has), the world will need about $ 14 trillion in new investment and 370 billion barrels of new crude oil supplies.

The point is that the age of oil and gas will not disappear in the foreseeable future and will likely last for decades, as demand for oil and gas is steadily growing but slower.

But in the face of natural decline This means that the rising world population and rapid growth in emerging markets will increase, rather than lower, crude prices over time, which will greatly benefit Exxon, EOG Resources and TransCanada's investors.

Let's take a look at why I see these three energy stocks as one of the best ways for dividend growth investors to benefit from both higher oil prices in the future and the entire North American energy agency.

Exxon Mobile: The Safest Oil Giant for Conservative High Yield Investors

Exxon is a legend in the oil industry, part of the Rockefeller Standard Oil empire, and has been paying uninterrupted dividends since 1882 (137 years old). It is one of only three dividend aristocrats in the energy sector (CVX and HP are the other two) and has been paying a rising dividend for 36 years. With the next quarterly statement, this number will increase to 37 years and Exxon will become the first oil company in the oil companies (in 2032).



(Source: Simply Safe Dividends)

Even more impressive is the fact that Exxon has a notable consistency in payout, even though it is in a heavily capital-intensive, volatile cash flow industry.



(Source: XOM Investor Presentation)

And the payout growth rate was not only absolutely impressive, but also compared to the other five integrated oil giants. Only his colleague Chevron (CVX) has come close to Exxon's dividend growth over the last decade.

This is due to the industry's strongest balance sheet, including a 9% debt ratio and a AA + credit rating.

Company Net Debt / EBITDA Interest Coverage Ratio S & P Credit Rating

Average Interest Cost

Exxon 1.6 28.1 2.2%
Security Level 1.5 or less 10 or higher BBB or higher NA
Industrial Average 0.7 11.5 NA NA 19659056] (Sources: Simply Safe Dividends, Gurufocus, FAST Charts)

All oil companies must use debt to deal with oil spills to finance investment and receive dividends. Therefore, a fortress-like balance sheet is for all blue chip energy investors. Exxon's conservative use of debt (the industry's strongest balance sheet) turns him into a Level 10 SWAN stock according to my new Sensei Quality heading.



(Source: Presentation by XOM Investors)

This section considers dividend security, business model risk, and management quality to determine the overall quality and risk profile of a company, and is based on an 11-point scale of 9 or higher acquire the SWAN status of a company.

Do you remember these long-term growth forecasts for the industry? Well, Exxon's $ 21 trillion (based on world market share) investment needed to fuel the world with oil and gas is $ 30 to $ 35 billion a year. That's exactly what management, now headed by Darren Woods (27-year-old veteran company), wants to spend over the next few years.



(Source: XOM Investor Presentation)

According to management, it is now the best time in 20 years to achieve higher ROI for new production spending, averaging about 20 in the next few years %.

In 2018, management enacted its new growth plan, which would provide over $ 200 billion in investment by 2025 ($ 64 billion in 2019 and 2020) and

  • likely to increase production by 25% of 4 million bpd oil equivalent would effect oil equivalent of 5 million barrels per day.
  • Increase in chemical production by 30% (40% in North America and Asia).
  • 20%, 20% and 15% ROCE in production, refining and chemistry. [19659065] Doubling of Refinery and Chemical Product Returns
  • Tripling profits from oil and gas production (assuming an average global oil price of $ 60 for oil) increased the dividend by at least 100%. Incidentally, the profit would triple by 2025, assuming an average oil price of $ 60.

    (Source: XOM Investor Presentation)

    In fact, with a crude oil volume of $ 80, management predicted that the company would generate free cash flow of $ 52 billion in 2025. Even with 6.5% dividend growth, $ 32 billion would mean billions of FCFs (FCF minus dividends) to repay debt, buy back shares, or invest in renewable energy.



    (Source: XOM Investor Presentation)

    Well, management's recent guidance takes these bullish numbers and raises them slightly higher. Exxon now expects that even if crude oil collapsed to $ 40, its growth plans will increase revenues and cash flow by 40%.



    (Source: Presentation by XOM Investors)

    Similarly, expectations for cash flow growth were also increased. Exxon now expects FCF's long-term growth of 7%, which could be higher per share as it resumes the buybacks. To finance this growth plan, the company plans to divest some $ 15 billion of non-core assets by 2021, some of which will actually repurchase after its CEO.



    (Source: XOM Investor Presentation) [19659071] Overall, Exxon expects free cash flow of $ 190 billion over the next six years, even assuming only $ 60 in crude oil. 53 percent will be needed for dividends and $ 90 billion for debt repayment, repurchase of shares and diversification of the business into renewable energy.

    But what will drive Exxon's growth in the next few years? This would be a series of growth catalysts, including

    • Guyana, where reserves are estimated at 5.5 billion barrels and Exxon expects to produce 750,000 barrels per day by 2025.
    • Brazilian offshore region: It has 2.3 million hectares (840,000 hectares in the previous year). and can achieve a return on investment of more than 10% with an oil price of just $ 40
    • The Permian Basin: Production will increase to around 1.4 million bpd (today 300,000) by 2024 (making up over 25% of the total) Corporate Production Off)

    Over Over the past year, Exxon has grown stronger and stronger. For example, in December, the company announced its 10th offshore discovery in Guyana. This was part of a series of five discoveries in 2018, which increased estimates of the Guyana Reserve by 60% last year alone. In 2019, Exxon discovered two other significant reserves off the coast of Guyana.



    (Source: Exxon Earnings Presentation)

    Exxon has deployed a second exploration vessel to search for more lucrative oil reserves, and reserve estimates have increased by 10% to over 5.5 billion in 2019, an increase of 450% However, in 2015 Guyana is unlikely to be the only promising growth catalyst that exceeds expectations.



    (Source: XOM Investor Presentation )

    The offshore prospects of Exxon are getting better and better. Guyana and Brazil offer massive reserves with break-even prices of $ 40 or less. At $ 60 (currently $ 67 and an average of $ 71 in 2018), Brazilian offshore assets would yield about 25%, while Guyana would be close to 40%.

    But while Exxon's offshore prospects have never looked so good, US slate plants are even more impressive.



    (Source: XOM Investor Presentation)

    The Company's Perm area holds an estimated 10 billion barrels of oilable equivalents (and growing rapidly) in over 20,000 drillable wells. It is estimated that 7,400 of them generate more than 10% return on their investment even at $ 40 oil. The company has just massively increased its forecast for future growth for this formation and doubled it compared to the already impressive growth estimates of the previous year.



    (Source: XOM Investor Presentation)

    Exxon plans to increase production in the Perm area five-fold by 2024, so 55 rigs will be sent to the formation this year (versus 42 in 2018). In addition, the company expects economies of scale and a new technology for fracking 3.0 (including real-time analysis of AI drilling) to reduce production costs to just $ 15 a barrel, compared to an earlier estimate of $ 20.

    For the Pre-Slate Oil Spill Cost of Shale in 2014-2016 was around $ 85. This shows how incredibly efficient and adaptable the industry in general and Exxon in particular was.



    (Source: Presentation of XOM Investors)

    In 2023 alone, Exxon expects free cash flow of $ 5 billion, suggesting that the United States super formation, the remaining reserves of 250 This could be a source of money for many years (possibly the largest ever discovered oil reserve). Even if oil prices dropped 33% to $ 40.



    (Sources: Rystad Energy, Rattler Midstream S-1)

    Exxon has been investing aggressively in shale for several years, including through the purchase of $ 6.6 billion of Bass Energy in 2017. The doubled its Permian reserves to 6 billion. and the reserves have since been climbing through organic discoveries and further acreage acquisitions.

    And with ever lower production costs, Exxon expects to be able to raise capital in the Perm region to $ 35 per barrel by 2025. In other words, Exxon's booming profitability in recent years is expected to improve for at least the next six years, but possibly much longer.

    But Upstream is not the only growth focus of the company. As you can see, Exxon's portfolio of lucrative investments, all aiming for a return on investment of at least 15%, is located around the world. This includes the downstream refining businesses and the high margin petrochemicals business.



    (Source: XOM Investor Presentation)

    Demand for petrochemicals is expected to exceed global economic growth rapidly and likely well beyond 2025 by 2025. This is because emerging markets such as China and India have an insatiable need for plastics, pharmaceuticals and all the different products that require petrochemicals like ethylene and propylene.



    (Source: XOM investor presentation)

    And if that were not enough, Exxon plans to become the world's second largest producer of liquefied natural gas by 2025.



    (Source: XOM Investor Presentation) [19659102] LNG demand is expected to grow faster than gas or oil demand, including an increase of more than 70% by 2030. This is because countries like China and India have their own Massive increase in the number of natural gas power plants as they seek to increase their economies while improving their legendary air quality.

    Ok, Exxon has several massive growth runways and plans to expand its production and downstream capabilities over the next few years. But what gives me the certainty that management can actually achieve these bullish growth targets?



    (Source: XOM Investor Presentation)

    This would be the industry-leading management team that historically has delivered the best return on investment for any oil corporation. In addition, over the last three years, the 2014-2016 oil spill has impacted the profitability of every oil company.



    (Source: XOM Investor Presentation )

    This is a profitable lead management that can hold its own over the next six years. The return on investment will double, even if oil prices double beyond time. And remember, after several years of massive underinvestment in new production, the price of oil could rise to over $ 80.

    And for those who have been disappointed with the flat production of the company over the last decade, you can count on Exxon always pursuing a long-term perspective. Therefore, industry has led to new discoveries that have led to proven reserves increasing steadily over time.





    (Source: XOM Investor Presentation )

    For this reason, Exxon, in combination with the largest investment budget in the industry, expects steady growth and relatively rapid growth in the next six years.

    Basically, Exxon is my preferred integrated oil company, thanks to the excellent combination of

    • excellent management (proven by industry-leading capital returns)
    • several giant growth catalysts
    • the strongest balance in the world industry (thus it can meet the ambitious growth plan 19659066] their competitors' best dividend success list (both the longest and the fastest)

    But while Exxon is undoubtedly a great company, that does not mean that it does not mean it does not take its share of risk into account before you invest.

    Risks to Consider

    Although Exxon may be a SWAN stock, that does not mean that there are no risks that investors must consider.



    (Source: JPMorgan Asset Management)

    The Company's cash flow (and share price) is strongly reacting to crude oil prices, which can be incredibly volatile. In fact, in the last decade, we have seen no fewer than three oil spills, with crude oil falling 40%. While Exxon has proven that it can maintain a rising dividend during these periods, anyone wishing to sell shares of the financing expenses (such as retirees using the 4% rule) must do so in portfolio construction and Consider asset allocation.



    Make You have enough cash and bonds (which gain value during recession / bear markets), so you do not have to sell high-quality dividend stocks at fire sale prices.

    Then execution and political risk must be considered. Not only in the US, where politicians often attack oil companies because of climate change, but also overseas. Exxon is a global company and has encountered problems in volatile countries such as Russia, Nigeria and Venezuela in the past. The quality management team can adapt to these changes, but setbacks can put the stock at risk, which can hurt the stock, and make it harder to gauge long-term growth prospects.

    That's the biggest risk if you own Exxon or a petroleum company. Oil projects can be very expensive and take several years. Good capital allocation (and ultimately cash flow and dividend growth) requires educated estimates that change over time as more data enters.

    While most corporate / government / analyst / analyst models show global oil and gas growth over decades, it's always possible that these estimates prove too bullish. Slower global economic growth, such as during a recession, could hurt Exxon and the industry as a whole in the short term, while long-term oil growth could lead to lower growth than currently expected.

    And we can not forget that it does not matter how long it takes for the age of oil and gas to end, at some point it is likely. Therefore, while Exxon and all oil and gas related companies are potentially large investments in long term dividend growth, they are not stocks that "buy and hold" forever.

    EOG Resources: The most direct way to profit from higher oil prices

    EOG is my preferred pure oil company due to several factors. One is the high quality of the company (it's a level 10 SWAN on my quality scale).

    The other is the excellent dividend balance, which is almost unequaled in its industry.



    (Source: Simply Safe Dividends)

    The EOG has gone over a quarter of a century without cutting its dividend. While the payout does not increase every year, the overall growth rate is sensational. The best of this very safe dividend will increase with 19% CAGR, according to management. With this payout growth rate of 19%, EOG is returning to its earlier long-term trend that it has maintained since 1999 (with no fewer than four oil spills and the financial crisis).



    (Source: EOG Outcome Presentation)

    Indeed, the reasons for owning the best independent oil company in America (in my opinion) can be summarized by the company's long-term goals described by its CEO Bill Thomas as the final conference call.

    "Our long-term game plan is simple: is one of the strongest performers in all sectors of the S & P 500 . Our goal is to achieve double-digit returns and double-digit growth during commodity price cycles In addition to high revenues and disciplined organic growth, our goal is to generate free cash flow supporting a growing dividend and a flawless balance sheet that allows the company to seize other opportunities such as real estate enhancements that meet our strict reinvested premiums standard or potential opportunities to earn shares on appreciation -Digit returns, double-digit growth and free cash flow aligns EOG with the best companies in all sectors of the market. "" – Bill Thomas (emphasis added)

    are some brave words, though exactly what blue-chip dividend investors want here. But rest assured that the EOG does not emit smoke when it says it wants to be one of the best companies in America. Just look at the impressive results for 2018

    • 19% production growth
    • Dividend increase of 31%
    • A record $ 1.7 billion in free cash flow
    • Net debt / capital of 19 % dropped from 25% to 19%
    • with 15% capital (against a target of 15% and a long-term average of 12%)

    What is the key to such impressive growth, while at the same time being an already bunker-like Booler how the debt is quickly reduced and strengthened? This would be the excellent management team focused on achieving return on investment (15% in 2018 versus an 8% target for quality oil companies).

    The EOG does not grow for its own sake and the compensation of the management is very closely tied to the return on investment. 90% of the production comes from US shale, which, as we have seen at Exxon, is fast becoming one of the most profitable oil wells in the world.



    (Source: EOG Information Sheet)

    Although the company has some overseas operations, the focus is on maximizing profitable production growth on the EOG in all of the hottest US shale formations, including the mighty Permian Basin.

    Last year, the reserve replacement rate of the EOG (New Reserves / Production) was a leading 238%, with an additional 400 million barrel barrels at an average cost of just $ 9.33. This means that EOG now has 2.9 billion barrels of proven reserves, equivalent to about 11 years of production. EOG has been one of the best oil companies in improving efficiency since the oil crash. This includes a 30% reduction in reserve replacement costs since 2014.

    What I love most about EOG is the very high standards of management for shareholder cash investment. Between 2009 and 2014, when few oil companies actually achieved capital returns above their cost of capital, the EOG was able to achieve this. And since 2016, the company has focused on premium drilling sites (90% of the holes to be drilled this year) that claim to achieve 30% internal after-tax return on $ 40 oil and $ 2.5 natural gas.

    In essence, this means that EOG needs $ 55 oil to generate double-digit return on investment, making it one of the most cost-effective and profitable oil companies in America. According to the CEO, the company plans to continually reduce costs over time and increase profitability by making better use of fracking technology and achieving economies of scale. In 2019 alone, EOG expects to cut drilling costs by 5% and exploration costs by 10%.

    The profitability of the EOG is supported by the fact that it is highly vertically integrated, at least as far as the oil companies are concerned. It owns its own frack sand mine and designs most of its material needs (such as pipes and drilling mud) in-house. This will improve quality control and reduce costs (6% in 2018).







    (Quelle: EOG-Ergebnispräsentation)

    Daraufhin konnte die EOG den Ölpreis, mit dem sie zweistellige Renditen erzielte, kontinuierlich senken. Das Ergebnis der qualitativ hochwertigen Bohrstandorte von EOG war die branchenführende Rentabilität. Damit erhielt ich meine höchste Bewertung für die Managementqualität (die hauptsächlich auf eine gute Kapitalallokation ausgerichtet ist).



    (Quelle: EOG-Ergebnispräsentation)

    Bei so hohen Rentabilitätsstandards könnten Sie denken, dass das Unternehmen nicht mehr viele Bohrstandorte mit hoher Rückführung hat. Aber du liegst falsch.

    EOG gibt an, dass 9.500 Bohrstellen mit hohem Rückfluss übrig sind, was 13 Jahren Bohrstau entspricht. Von diesen 8.000 sind "Premium" -Seiten, von denen erwartet wird, dass sie diese Renditen von mehr als 30% erzielen. Dies ist einer der insgesamt 20.000 Bohrstandorte, die einen Bohrstau von 20 bis 30 Jahren darstellen. In den letzten Jahren hat der Auftragsbestand von EOGs Bohrstandort um 3.500 zugenommen, da die Anbaufläche, die er bereits besitzt, sowie die Übernahme durch M & A weiter erforscht werden.



    (Quelle: EOG-Ergebnispräsentation)

    Besser noch, EOG verfügt über eine hervorragende Erfahrung bei der Modernisierung seiner Bohrstandorte von Standard- auf Premium-Niveau, dank seiner Erfahrung im Fracking (es war eines der ersten Erdölunternehmen, das diese Praxis übernahm.) und hat eine Menge Erfahrung) und verbesserte Materialdesigns. Beispielsweise hat das Unternehmen 2017 mehr Standorte zu Premium ausgebaut als gebohrt. Dies bedeutet, dass nicht nur die Produktion und der Gewinn beeindruckend gesteigert werden konnten (die Gewinne stiegen um 400% in diesem Jahr), sondern auch der Auftragsbestand an Premium-Bohrstandorten und der Blockbuster von 2018 Jahr.

    Das bedeutet, dass der EOG keine Premium-Websites zur Verfügung stehen sollten, um die Produktion und den Cashflow über viele Jahre aufrecht zu erhalten, selbst wenn die Ölpreise unverändert bleiben oder sinken. Wenn sie steigen, wie ich es erwarte, wird EOG in bar schwimmen.

    Im Jahr 2019 fordern die Investitionen in Höhe von 6,3 Milliarden US-Dollar 740 Netto-Bohrungen, was zu einem Produktionswachstum von 12% bis 16% führt, ein Niveau, auf das nur wenige seiner Mitbewerber (oder jedes Ölunternehmen) hoffen können, mithalten zu können. Innerhalb von nur zwei Monaten des Jahres waren bereits 65% der zur Erreichung des diesjährigen Wachstumsplans erforderlichen Materialien und Dienstleistungen gesichert.

    Unternehmen Nettoverschuldung / EBITDA Zinsdeckungsquote S & P-Kreditrating

    Durchschnittliche Zinskosten

    EOG-Ressourcen 0.7 17.7 A- 3,6%
    Sicherheitsstufe 1,5 oder weniger 10 oder höher BBB oder höher NA
    Industriedurchschnitt 3.0 10.6 NA [19659037] NA

    (Quellen: Simply Safe Dividends, Gurufocus, FAST Graphs)

    Aber genau wie bei Exxon ist die EOG-Bilanz eine Festung. Die Verschuldungsquote ist niedrig, die Abdeckung der Zinssätze ist sehr hoch, und es verfügt über eine der höchsten Bonitätsstufen eines unabhängigen Mineralölunternehmens. Daher sind die Finanzierungskosten nahezu fünfmal niedriger als die Kapitalrendite.

    Und zwischen 2018 und 2021 plant EOG, seine Schulden in Höhe von 6,1 Milliarden US-Dollar in Höhe von 3 Milliarden US-Dollar zurückzuzahlen, was eine der stärksten Bilanzen der Branche noch sicherer macht. Dies wird es ihm ermöglichen, seine sichere Dividende aufrechtzuerhalten und weiter in ein hohes Margenwachstum zu investieren, selbst wenn die Ölpreise in die 30-Dollar-Marke fallen.

    Tatsächlich ist diese Bilanz ein wesentlicher Grund dafür, dass EOG ein so starkes Dividendenwachstum erzielt hat, einschließlich der Möglichkeit, die Dividende während vier Ölunfällen in den letzten 20 Jahren und der Großen Rezession aufrechtzuerhalten oder sogar zu steigern. Das liegt daran, dass der operative Cashflow des Unternehmens dank seiner extrem niedrigen Kosten sowohl die Investitionen als auch die Dividende bei einem Ölpreis von nur 50 US-Dollar decken kann.



    (Quelle: EOG-Ergebnispräsentation)

    Wenn die Ölpreise höher steigen, wird EOG nicht nur sein langfristiges Dividendenwachstumsziel von 19% erreichen, sondern wird in der Lage sein, opportunistisch viele Aktien zurückzukaufen, was dazu führen wird FCF / Aktienwachstum wird weiter beschleunigt.

    Im Grunde ist EOG das, was ich als den hochwertigsten Stand-Alone-Blue-Chip-Rohstoff bezeichne, und die SWAN-Aktie, die am besten positioniert ist, um vom US-Schieferboom und den höheren Ölpreisen zu profitieren. Aber wie bei jedem Unternehmen gibt es natürlich Risiken, die vor einer Investition zu berücksichtigen sind.

    Zu berücksichtigende Risiken

    EOG ist zwar eine SWAN-Ölfirma, aber dennoch eine Ölfirma. And unlike Exxon, it doesn't have a downstream segment to buffer cash flow during oil crashes (refining and chemical profits usually go up when oil prices drop).

    In addition, unlike most years, when EOG has hedged 50% of its production to lock in guaranteed prices, in 2019 it's chosen a bold move to not hedge and thus gain any upside potential should crude move higher. But of course, if we were to get another oil crash, then it's cash flow could fall significantly.

    And while EOG's management is excellent in terms of overall capital allocation, that doesn't mean it doesn't make mistakes. In 2015, the first full year of the 2014 to 2016 oil crash, it wrote down $6 billion worth of goodwill on previous acquisitions it made. Fortunately, management has said it has no plans for further large scale M&A given its enormous backlog of premium drill sites which it can spend the next decade profiting from.

    Finally, investors need to remember the one major downside of shale production. While new wells can be brought on-line quickly and relatively inexpensively (and that cost is falling over time), shale wells also have very fast decline rates of up to 90% within the first year (then it tapers off).





    (Source: EOG earnings presentation)

    And while EOG's first mover advantage in shale means its expertise is among the best of its peers (thus its initial production levels are among the best), ultimately EOG needs to keep drilling a lot of new wells to maintain steady production, much less grow it at double-digits per its long-term goal.

    In other words, EOG represents one of the highest quality blue-chips in US oil BUT it still has a risk profile that makes for highly volatile cash flow and a stock price very sensitive to crude prices.

    TransCanada: A High-Yield Dream Stock With Far Less Commodity Risk

    For those that want to profit from North America's energy boom and higher oil prices over time, but don't want the cash flow volatility that comes with owning energy producers, midstream is the place to look for your high-yield, dividend growth needs. TransCanada is one of my top blue-chip recommendations in this industry.

    TransCanada is North America's second-biggest energy infrastructure operator, thanks to being founded in 1951 and having over 60 years to build out a continent-spanning network of pipelines, gathering, and storage assets. In fact, since 2000 alone the company has spent over $63 billion building out its infrastructure network. A network that consists of over 60,000 miles of gas and crude pipelines that carry 20% of Canada's oil and 25% of all the natural gas used in North America.



    (Source: TransCanada investor presentation)

    Those cash-rich assets include such gems as the NGTL and Mainline systems, which supply 75% of Canada's natural gas takeaway capacity from Western Canada's Sedimentary Basin or WCSB, which holds the continents largest deposits of natural gas.



    (Source: TransCanada Investor Presentation)

    It also owns the Keystone crude pipeline, the second biggest on the continent, which connects Canadian crude production to key refining and export capacity in the Midwest and Gulf Coast, respectively.

    The company also owns 6.6 GW worth of regulated electric production capacity (from 11 power plants serving over 6 million customers), further providing it with steady and recession resistant cash flow.

    The stability of the distributable cash flow or DCF (midstream equivalent of FCF and what funds the payout) is imperative. TransCanada's DCF is incredibly stable thanks to being so highly diversified and the great nature of its contract profile.

    For example, the NGLT and Mainline gas pipelines have volume committed "take-or-pay" contracts with an average remaining duration of 10 years. This means customers reserve space on the system and whether or not any gas gets shipped, TransCanada is guaranteed to get paid in full. These contracts are nearly entirely with investment grade counterparties, including regulated utilities, meaning little default risk.

    Keystone's 20-year initial contracts have 13 years remaining and 90% of that capacity is covered by these volume commitments (the most regulators would allow).

    The Mexican pipelines have 25-year volume committed contracts as well, and overall TRP's average remaining contract is for over 10 years in duration. Initial contracts range in length from 15 years to 100+ years.



    (Source: TransCanada Investor Presentation)

    In total 95% of cash flow is either regulated or under long-term take-or-pay contract, meaning extremely low cash flow variability, no matter what the economy or oil & gas prices are doing.



    (Source: TRP corporate profile)

    This highly stable and recession-resistant cash flow is what's allowed TRP to deliver 19 consecutive years of dividend growth, and at an impressive 7% growth rate. That rate is expected to increase to 8% to 10% dividend growth through 2021, supported by some of the most rapid cash flow growth of any midstream blue-chip (level 9 SWAN stock on my quality scale).

    The company's short-term growth plans include expanding its pipeline capacity by about 1.8 million bpd in the next few years, which should make that long-term growth forecast achievable.



    (Source: TRP corporate profile)

    And in the long-term, its growth backlog, including Keystone XL and related projects, is about $35.3 billion (including the shadow backlog), the largest in the industry. $27 billion of that is expected to be completed by 2023 and $15 billion is already under construction. All those projects have already secured long-term contracts for the majority of their capacity, including for 93% of Keystone Xl's capacity.

    Company Debt/Adjusted EBITDA Interest Coverage Ratio S&P Credit Rating

    Average Interest Cost

    TransCanada 5.1 4.4 BBB+ 4.4%
    Safe Level 5 or less 2 or more BBB- or higher NA
    Industry Average 4.4 4.5 NA NA

    (Sources: Simply Safe Dividends, earnings presentation, Gurufocus, F.A.S.T Graphs)

    As importantly, TransCanada's balance sheet is one of the strongest in the industry, which is why it's tied with other midstream blue-chips (like EPD, MMP, and ENB) for the highest credit rating in midstream (BBB+). That locks in low borrowing costs that make it easier to grow profitably and is what's likely to help keep the dividend growth record strong.



    (Source: TRP corporate profile)

    TRP has managed to achieve its impressive cash flow and dividend growth while steadily deleveraging its balance sheet, which is an industry-wide trend. By the end of 2019 management expects the leverage ratio to be under 5. Not just is that a level seen as safe by the credit rating agencies and bond investors, but it's a level management has said it plans to maintain over time.



    (Source: TRP corporate profile)

    That strong balance sheet, when combined with TransCanada's industry-leading low DCF payout ratio (just 42% over the past 12 months) is what supports a self-funding business model. TRP's growth prospects are entirely independent of its share price, which makes a low-risk investment thesis even safer.

    Today TransCanada has $7.5 billion in liquidity available under its revolving credit lines, in addition to retaining nearly 60% of DCF to fund its ambitious growth efforts.

    Basically, TransCanada is one of the biggest, best run, and fastest growing blue-chips in the thriving midstream industry, and the decades-long energy boom represents an excellent long-term growth runway. That's because, based on the latest estimates from various energy agencies and industry reports, the total amount of North American midstream growth spending needed through 2050 is over $1 trillion.

    That means that even giants like TransCanada are likely to deliver generous, safe and steadily growing dividends not just for many years to come, but likely for decades.

    Risks To Consider

    TransCanada has some important factors pertaining to its dividend that investors need to be aware of. The first is that the payout is in CAD which means there is short-term currency fluctuations that can make the USD dividend each quarter slightly variable. While this tends to cancel out over time, those who need rock steady income (like retirees looking to pay bills) need to keep this in mind.

    The other thing to know is that as a Canadian company taxable accounts are subject to a 15% Canadian tax withholding (retirement accounts are not). Fortunately, a US tax credit offsets the entire amount for most US investors (other than the highest income earners). But just $300/$600 per person/couple of your total foreign tax withholdings (across all foreign stocks in all portfolios) can be taken using the standard 1040 tax form.

    For figures above this amount the more complicated Form 1116 is required. While TRP doesn't use a K-1 tax form (which many investors want to avoid) its foreign status can potentially make for tax prep complexity of its own.

    As for business model risk, the biggest issue for TransCanada (and all midstream operators) is execution on its growth backlog. The Keystone XL pipeline is a perfect example of how large and complex pipeline projects can often get tied up for years in the courts, as environmentalists try their best to stop anything that helps grow North American energy production.

    Keystone XL was begun in 2008, but the $8 billion project was canceled in 2015 when President Obama revoked its regulatory approval in the US. President Trump then reversed that decision, and the company obtained enough volume committed contracts to proceed with the project. But then the project got delayed again due to the Nebraska Supreme court reviewing its approval in that state.

    Analysts expected the project to eventually get completed (in 2022) but the pipeline suffered yet another setback on March 18th when the US Ninth District Court of Appeals refused to overturn an earlier ruling by the US District court overseeing Montana, which blocked that section of the pipeline.

    TransCanada says this setback could cost it $900 million and delay the project by a full year (due to the timing of pipeline construction, which is seasonal). It's always possible that the project might have to be canceled again, in the face of never-ending court delays and a possibly much more hostile US president (to the energy industry) in 2021 and beyond. Keystone underpins about $15 billion or 45% of the company's total potential growth backlog, and so the cancellation of that project would represent a significant blow to the company's growth potential.

    Fortunately, management, led by CEO Russ Girling, a 25 year veteran of the company, is more than capable of adapting to these challenges. Girling has been CEO for over eight years now, and before that served as both CFO and COO. While great management can't guarantee that every project makes it to completion, I'm confident that TransCanada will be able to deliver its generous and safe dividend along with very steady payout growth.

    Execution risk merely means that the growth rate of that very safe dividend is more in doubt than management's bullish guidance might initially indicate.

    Total Return Profile: All 3 Will Likely Beat The Market Over The Coming Years

    What drives my investing recommendations (and portfolio buys) is a stock's total return profile which consists of four things, yield, dividend safety, long-term growth prospects, and valuation. These are what historically determine total returns.

    Company Yield TTM FCF Payout Ratio Expected Long-term Cash Flow Growth Total Return Expected (No Valuation Change)

    Valuation-Adjusted Total Return Potential

    Exxon 4.1% 84% 7% to 8% 11.1% to 12.1% 12.2% to 14.3%
    EOG Resources 1.0% 28% 11% to 19% 12% to 20% 11.1% to 22.7%
    TransCanada 4.7% 42% 7% to 8% 11.7% to 12.8% 13.5% to 14.5%
    S&P 500 1.9% 33% 6.4% 8.3% 2% to 8%

    (Sources: Simply Safe Dividends, F.A.S.T Graphs, Morningstar, analyst estimates, Moneychimp, Multpl.com, Yardeni Research, Gordon Dividend Growth Model, Dividend Yield Theory)

    Exxon and TransCanada are offering highly attractive yields at least double that of the broader market. EOG's yield is paltry but growing at almost 20% over time, making it a great income growth investment. All three stocks have very safe dividends thanks to sustainable and stable or declining (in the case of Exxon) cash flow payout ratios. Remember Exxon is targeting a long-term payout ratio of 52%.

    The other half of dividend safety is the balance sheet, and we've already seen how all three blue-chips have safe debt levels and very strong investment grade credit ratings.

    In terms of dividend growth Exxon is likely to stick to its historical 6% to 7% payout growth rate, TRP is likely to deliver 7% to 8% over time and EOG will be the growth rockstar with 19% CAGR per management guidance.

    This means that, excluding valuation changes, each energy stock should deliver solid long-term double-digit total returns, which is far superior to the 2% to 8% long-term returns the S&P 500 is expected to see in the coming years (per analyst estimates according to Morningstar).

    But better yet, at today's prices all three stocks are also undervalued, meaning that investors can enjoy a nice little valuation boot that will enhance those already attractive potential returns.

    Valuation: All 3 Energy Stocks Are Likely Good Buys At Today's Prices



    (Source: Ycharts)

    Exxon and TransCanada have had a solid start to the year while EOG has not. But the good news is that all three stocks are still good to great buys right now. That's based on my favorite valuation method for blue-chip dividend stocks, dividend yield theory or DYT. This is the only strategy that asset manager/newsletter publisher Investment Quality Trends has used since 1966.



    (Source: Investment Quality Trends)

    Decades of market-beating returns (and the best risk-adjusted track record of any newsletter over the past 30 years according to Hulbert Financial Digest) give credence to this approach. DYT simply compares a stock's yield to its historical yield, because unless the thesis breaks, yields tend to cycle around a relatively stable level that approximates fair value.

    Company Yield 5-Year Average Yield Estimated Discount To Fair Value Long-Term Valuation Boost
    Exxon 4.1% 3.6% 12% 1.2%
    EOG Resources 1.0% 0.7% 23% 2.7%
    TransCanada 4.7% 3.9% 17% 1.8%

    (Sources: Simply Safe Dividends, Dividend Yield Theory, Moneychimp)

    Today DYT says all three companies are trading at discounts to fair value, implying a nice long-term valuation boost as their yields return to historical norms. EOG's estimate might be somewhat suspect because the low yield/fast growth rate means that few investors own it for income. So to confirm I look to Morningstar's three-stage long-term discounted cash flow models.

    Company Morningstar Fair Value Estimate Discount To Fair Value

    Long-Term Valuation Boost

    Exxon $90 10% 1.1%
    EOG Resources $85 -9% -0.9%
    TransCanada $53 14% 1.5%

    (Source: Morningstar)

    Morningstar's fair value estimates on XOM and EOG assume $55 long-term oil prices, which would represent a roughly 10% decrease from current levels. This means that the above fair value estimates might be overly conservative if oil prices average $60 or more, as Exxon and most analysts expect.

    But Morningstar is known for some of the most conservative growth estimates and assumptions on Wall Street so it's still useful to see what they consider a good price for any blue-chip. In this case, Morningstar's estimate agrees with DYT on XOM and TRP but they consider EOG slightly overvalued.

    I personally disagree given my belief that strong demand/supply fundamentals will result in higher oil prices than Morningstar is baking into its models. Thus I split the difference between Morningstar's FVE and DYT and estimate EOG to be about 7% undervalued.



    • Exxon: 12% undervalued = strong buy
    • TransCanada: 17% undervalued = strong buy
    • EOG: 7% undervalued = buy

    Based on my personal valuation scale that makes all three stocks worth buying today, though Exxon and TransCanada are the stronger buy recommendations for new money today.

    Bottom Line: These 3 Energy Dividend Growth Stocks Are Great Ways To Profit From The Ongoing US Energy Bonanza

    Don't get me wrong, I know that the oil & gas/midstream sectors aren't for everyone. Some people simply wish to avoid it entirely, whether on personal/moral grounds, or a desire to only invest in "buy and hold forever" stocks, which none of these three are.

    However, if you are comfortable with the energy sector's risk profile and don't mind crazy high stock price volatility at times, Exxon, EOG, and TransCanada are great long-term investments.

    Exxon is the ultimate oil SWAN stock, with the dividend aristocrat offering the best payout growth record in the industry. Management's long-term growth plans are highly ambitious but I'm confident that its fortress-like balance sheet and quality leadership can deliver on them, resulting in 6% to 7% long-term dividend growth and market-beating total returns.

    EOG Resources is the most direct beneficiary of the American shale boom and rising oil prices. The company is a low-cost industry leader, capable of surviving another oil crash with its dividend intact as it proved during the last four commodity crashes. And that 19% long-term dividend growth plan makes this low-yielding hyper growth stock a potentially attractive buy at today's roughly 7% undervalued price.

    TransCanada is one of the largest energy infrastructure giants on the continent and a great way for high-yield dividend growth investors to profit from North America's energy boom, but without the inherent cash flow volatility that comes from actual energy producers. I fully expect TransCanada to become a dividend aristocrat in a few years, and deliver some of the midstream industry's top growth rates for many years to come.

    Disclosure: I am/we are long XOM, TRP, EOG. I wrote this article myself, and it expresses my own opinions. Ich bekomme keine Entschädigung dafür (außer von Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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