The Super Major Energy Portfolio: Investing in Integrated Oil
The tanking of the international oil markets hit a fever pitch towards the end of 2014 and as a result, shares of oil & gas companies declined substantially throughout 2015 and into 2016. Since then, there has been a recovery of sorts with the price of oil going above $50 a barrel recently (though it has dropped below that again). With this sector rocked with so much volatility, I viewed it as an opportunity to buy up some of the oil majors on the down slope of their cyclical trajectories, and in the process lock in some of the high yields that this decline presented. In this post, I wanted to take a look at how the investments I mad in oil & gas stocks have done since I began buying them and the role of dividends in absorbing such wild price fluctuations.
The Super Major Portfolio
When the plummeting of oil stocks first caught my attention, I began to research potential investments within this industry. One of the things that I found out was just how many small wildcatter type of operations there were and how much financial danger some of these companies were actually in. While there was of course money to be made in speculating which of these smaller firms would double or triple from the bottom of the market within a few months, I didn’t want to get dragged down into ‘investing’ into companies I wasn’t sure would exist a month after I’d bought in.
Another route that I looked into was ETF’s which specialized in the energy sector. This seemed like a great way to diversify and spread out some of the risk but they were still so chock full of names that were no longer profitable, near bankruptcy, etc. that I didn’t really want to be involved with them either.
Finally, I decided to construct my own sort of energy portfolio which would eventually consist of each of the integrated super major companies: ExxonMobil, BP, Royal Dutch Shell, Chevron, and the French Giant, Total. Each of these companies are massive and have the assets to weather the storm and potentially buy up smaller companies on the cheap. Also, buying shares in each as they became attractively priced helped to diversify in case of some catastrophic event occurring, like the BP spill in 2010.
I wanted to have the holdings of this portfolio weighted to where ExxonMobil was the largest component due to their financial strength and the returns that the company generates on the capital it employs. Next, I wanted Royal Dutch Shell and Chevron to be around the same weighting. Then, BP, since it was still working through the legal ramifications of 2010. Finally, Total would be a smaller piece of the puzzle due to potential tax liabilities with the French government and weaker returns.
How This Has Turned Out So Far
So, I haven’t been able to complete my super major portfolio as of yet. Chevron remain elusive and its lows often coincided with my purchases of XOM and RDS-B. CVX currently trades near a 52 week high and isn’t quite as attractive as it was in the past. I’m hoping for another big pullback in order to initiate a position. Total simply never got cheap enough in my opinion to justify a purchase…maybe I should get some shares around $40 for further diversification of this portfolio but I’m not completely sold on that idea, even if it has had some decent quarters lately.
I did however, enroll in the direct stock purchase plan (DSPP) for Phillips 66 (PSX), when I also signed up for Exxon’s DSPP. PSX was spun off from parent company, ConocoPhillips back in 2012, which has severely exposed that company to the big drop in oil prices. I chose to invest in PSX because it was not just a refiner but was also quickly diversifying its revenues into chemicals plus down stream and mid-stream oil assets. Phillips 66’s DSPP is free of fees to purchase shares and can be done for as little as $25. Since I began investing with the plan, the company has raised its dividend twice from 50 cents per share to 63 cents per share now. That’s a 26% increase in less than a year and a half.
BP and RDS-B have frozen their dividends at this point in time, so no increases on that front. However, during their lowest points, each was yielding over 10%. XOM has recently raised its dividend by 2.7%, which is decent enough, especially with the price appreciation I’ve gotten so far with the stock.
Obviously, this energy portfolio is still a work in progress and a long-term proposition, that I think will eventually include other natural resource firms such as BHP Billiton but this is what I’ve gotten up to this point:
Holding and Current Shares:
BP: 7.6025 (-9.98%)
PSX: 6.071611 (+3.86 %)
RDS-A: (from B share dividends) 0.5861
RDS-B: 16.0751 (-7.90% without dividends included) (-4.2% with dividends)
XOM: 11.208947 (+17.19%)
Total Invested: 2457.54
Dividends Received: $103.81
Yearly Dividend Estimate: $129.82
Current Dividend Yield on Cost: 5.28%
Total Value as of 6/15/16 close: $2555.80
Total Return as of 6/15/16 close: $98.26 +3.99%
A 3.99% appreciation isn’t bad in this climate. However, keep in mind that up until a week or so ago my position in Shell had gone positive and PSX has retreated from its price around $90 down to around $78, as of writing. I’ve also only made one small purchase of BP of 7 shares, from which I’ve gotten an extra .6025 from dividend reinvestment, but I haven’t picked up any more on the cheap…which looks like I might get the chance if the Brexit happens.
Quite simply, dividends can keep you in the game, even in a tough environment. The reason I stuck with the super majors is that I believed that they have the financial might to make it through without taking too much of a beating. Yes, the dividend of Shell and BP may have to be cut at some point in the future but I think that they will take whatever steps necessary to keep it in tact for as long as possible. Plus, I’m in this for the long haul, I plan on making these shares generational holdings (especially once more money is added to this ‘energy fund’) and not simply speculation on short-term energy price fluctuations.
I can compare the results of this portfolio with that of my Vanguard shares (VTSMX) purchased through my job’s retirement plan. Shares have been bought monthly since January 2015 and have returned 1.8% so far with dividends reinvested. Sure, a lot less volatility but fewer potential rewards as well. Even this index fund is carrying shares of XOM, CVX, PSX, COP anyways, its just masked by the other thousands of companies held within its confines.
Overall, its not a bad start. I wish I had loaded up more Shell at $37 a share and more BP at $27. I did get a bit of Exxon when it was testing its lows last summer but it has climbed significantly since then. I’ll throw more cash at it upon a pull back and wait patiently for better potential prices for all of these companies.