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My friend Barbara phoned and invited me to lunch a few weeks
ago. When she offered to pay, I knew something was up.
Barbara talked about her workout routine, her daughter's job
search, and her upcoming vacation to Panama. After asking me
a cursory question or two, she finally got to the point.
"I'm bullish on oil," she said. "Oil stocks have had great
recoveries in 2009. But I'm not sure about how much further
they'll go up this year." I nodded and waited for the punch
line.
"What I want is to find stocks that offer capital gains as
oil continues to rise, but also throw off high income while
I wait. I can't find oil stocks that offer the kind of
yields I want. I've checked."
Barbara is right. Most of the major oil producers like
ExxonMobil (NYSE: XOM) offer low yields. BP (NYSE: BP) is
the highest-yielding of the bunch, but its yield is still
only 6%.
So if you're bullish on crude, where can you also find a
high yield?
 Bullish
Case for Oil
No doubt about it, the 2010 outlook for crude oil is
positive. Not wildly bullish, but constructive enough to
make stocks in this sector worth looking at.
According to a panel of 28 analysts polled by Forbes, crude
will average an estimated $75.40 per barrel in 2010, up from
about $60.90 per barrel in 2009. The analysts are hardly
going out on a limb, given that oil for February delivery is
currently above $75 per barrel.
But if the analysts are right, oil companies will receive
around +24% ($75.40/$60.90) more in 2010 versus 2009 for the
same (unhedged) production volumes. Simply by standing still
and producing the same volumes, earnings should rise.
Companies with rising production should, in general, fare
even better.
But the Forbes consensus figure may be conservative. Earlier
in 2009, Morgan Stanley forecasted an average oil price of
$85 in 2010 and $95 in 2011. And Sanford C. Bernstein & Co.
analysts think we could see triple-digit oil prices by late
2010 or early 2011.
While few expect to see the $147 a barrel peak of July 2008
any time soon, two big tailwinds are behind these bullish
projections.
Demand is increasing in emerging markets, like China, as the
global economy recovers. In the U.S., which together with
China consumes an estimated 33% of global oil, demand is
also picking up. Worldwide consumption is forecast to rise
nearly 2% to 86.2 million barrels a day in 2010, according
to a monthly report from the International Energy Agency.
Also, a weak dollar should benefit oil, which is purchased
as an inflation hedge. The massive increase in debt issued
by the U.S. government has raised the specter of inflation,
which could continue to put upward pressure on commodities
like gold and oil.
Search for High-Yield Oil Plays
But as my friend Barbara pointed out, you simply can't find
the high yields by looking at the "majors." Even independent
oil and gas companies like Anadarko (NYSE: APC), Devon
Energy (NYSE: DVN), or Pioneer Natural Resources (NYSE: PXD)
leave much to be desired in the yield category.
But if the majors and larger independents aren't the place
to be, what about small and micro-cap stocks -- those with
market caps below $2 billion?
When I ran a small-cap screen, I struck pay dirt. I found
numerous oil and gas stocks with yields of 8%, 9%, 10% and
higher. Barbara's problem was solved.
For example, MVO Oil Trust (NYSE: MVO) pays a
mouth-watering 9% and is expected to grow earnings per share
+20% this year -- not too shabby.
And the exciting thing is there are a number of similar
small-cap oil plays that will pay you a strong yield while
also benefiting from strong oil prices. In fact, I approached
this topic in a recent issue of High-Yield Investing,
pinpointing
four small-cap oil plays that yielded up to 17%.
So if you're hunting for a way to lock in high yields from
oil, the key might be to simply think smaller.
Good Investing!
Carla Pasternak's Dividend Opportunities
P.S.
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Research@DividendOpportunities.com,
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