16 Dividend Income Opportunities in the Energy Minerals Sector, but Beware the Nature of the Beast:


The Energy Minerals Sector is comprised of 619 companies. And, as it is with every sector, they come in all shapes, sizes and colors. However, a common attribute that is shared by most companies in this sector is a significant amount of cyclicality in their operating results, i.e., earnings and cash flows. As a result, capital appreciation results can be both unpredictable and even poor for extended periods of time. On the other hand, the dividend records of many companies in this sector, especially the Major Integrated Oil Producers tend to be more consistent and, in many cases, quite attractive.

Consequently, for the most part, companies in this sector tend to be more appealing to the dividend-oriented investor. In addition to good records of dividend growth, there are many opportunities to invest in Energy Minerals companies that offer above-market dividend yields. And as you will see in the portfolio review below, the dividend yields of most of the companies featured in this article are significantly above-market average.

Additionally, it would be valuable to recognize that FactSet only provides four primary subsectors to the Energy Minerals Sector. However, with this article I am only presenting companies in three of the four subsectors. My screen did not identify any company in the coal subsector that met my criteria. On the other hand, there were seven Integrated Oil Companies, six Oil Refining/Marketing and only two Oil and Gas Production companies that my screen identified as attractively valued.

Furthermore, there is one interesting attribute that I identified with the Integrated Oil Companies that is important to recognize. The operating performance (i.e. earnings) of the major integrated oil companies tend to be highly correlated and sensitive to the price of crude oil. In other words, where the price of crude oil goes the earnings of these companies tend to follow. To illustrate the high correlation and sensitivity to oil prices for the integrated oil companies I offer the following two graphs. The first is the price of crude oil since calendar year 2000. With the second graph I offer the operating earnings of Exxon Mobil Corp. over essentially the same timeframe. Note that Exxon Mobil Corp.’s earnings almost perfectly correlate to and follow the price of crude. This partially explains the cyclicality that I referenced above.