Don't Miss AI's Third Wave
The WTI oil price has declined from a high of over U$100 to under U$50 within a year. Along with the fallen oil price, many, if not all, energy-related companies have experienced double-digit dips. However, there’s at least one good thing that came about from the oil price plummet—it has helped us identify the best energy companies.
Defining the best energy companies
Many big energy companies pay out dividends. This is especially important for dividend investors who look for positive returns from dividends no matter if the share price is going up or down. So, the safety of the dividend is top priority.
It follows that the best energy companies are the ones that have not only maintained their dividends, but increased them as well. And these cream-of-the-crop companies must have increased their dividends within the past 12 months.
The best dividend companies in the energy sector
Here are some of the best of the best energy companies that have increased their dividends in the last 12 months: Ensign Energy Services Inc. (TSX:ESI), Enbridge Inc. (TSX:ENB)(NYSE:ENB), and Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ).
| Company | Yield | Debt/Cap | Industry | Streak | Last Increased | Last DGR | Historical DGR |
| Ensign Energy | 4.7% | 27% | oil & gas drilling | 20 | Dec 2014 | 2.1% | 5-7% |
| Enbridge | 3.3% | 60% | oil & gas midstream | 19 | Feb 2015 | 32.9% | 11-14% |
| Canadian Natural Resources | 2.9% | 31% | oil & gas exploration and production | 14 | Mar 2015 | 2.2% | 24-36% |
DGR: dividend-growth rate
Canadian Natural Resources’s dividend experienced exceptional growth, particularly from 2013 to 2014. From the start of 2013, it paid a quarterly dividend of $0.125 per share to $0.225 in 2014, a growth of 80%! This was supported by exceptional earnings and revenue growth at the time, coupled by payout ratio expansion. The collapse of oil prices resulted in only a 2% growth of dividends for this year.
Enbridge’s assets that generate stable cash flow shine brightly in the dim outlook of the energy industry. That’s why it was able to increase dividends at an amazing rate this year.
Valuation
Because earnings jump around a lot due to oil price changes, I’m using the price-to-book (P/B) and price-to-cash-flow (P/CFL) ratios for the valuation analysis.
Ensign Energy’s P/B is at a decade’s low of 0.7. To my surprise, its P/CFL is also at a decade low of 2.6, which may indicate that Ensign Energy is maintaining much of its cash flow—a positive sign. Of concern is its declining operating margin from 2011’s 17% to the trailing 12-month’s 6%.
Interestingly enough, Canadian Natural Resources’s P/B is at a decade low of 1.2 and its P/CFL is close to a decade low.
Based on the P/B and P/CFL, Enbridge is not near a decade-low cheap valuation. However, based on its price-to-funds-from-operations, it should be trading around $65 in a year. In my opinion, Enbridge is not one for trading; instead, it is a good long-term holding. The company intends to increase dividends by 14-16% between 2016 and 2018, which is supported by earnings growth of 10-12% and some payout ratio expansion.
How should you take advantage of the dip?
In hindsight it’s easy to catch the bottom, but in the present it’s a guessing game on how low the energy companies will fall and how long they will stay low.
Additionally, most of us have limited capital to deploy. So, one strategy Foolish investors can employ is to choose the top company that fits with your investment goals and dollar-cost average into it over this period of low oil prices.
This way you don’t have to worry about catching the bottom. Instead, focus on buying while they’re low. Simultaneously, look into buying quality companies in other sectors that are priced at a value to diversify your investment portfolio.
If I could only pick one to buy today, I’d choose Enbridge.
