The oil firms gushing income

Our analysis should also present us with an exercise in capital market efficiency. Many of the companies in this analysis are multinationals performing pretty much the same business operations and you would expect the fundamentals to be reasonably aligned.

Our initial criterion is to select the 'oil and gas producers' sector globally and this gives us a list of 18 stocks that are covered by DividendMax.

Our next selection criterion is for the companies to have an annualised yield of more than 2 per cent. This eliminates three US and two UK stocks including Tullow oil and BG Group, while Technip of France is also eliminated. This leaves us with a list which includes Premier Oil, GalpEnergia SGPS, Occidendtal Petroleum, ConocoPhillips, Exxon Mobil, Chevron, BP, Repsol, Gas Natural SDG, Enagas, Total and Royal Dutch Shell. We cover six variants of Royal Dutch Shell in DividendMax, but we will focus on the UK 'A' and 'B' shares.

An important point to make when using DividendMax and dealing with a sector such as oil is that it is not appropriate to use the "three dividend analysis" as most of these companies pay quarterly dividends and we like to work on an 18 month or longer timescale. Instead we will use the 'duration' function and select the 18-month option. This will bring up the next three dividends for those who pay the conventional interim/final and the next six dividends for those who pay quarterly.

We will leave it to the reader to decide if the markets are operating efficiently. We are going to eliminate GalpEnergia SGPS on price/earnings (PE), dividend cover and yield considerations as those fundamentals look wrong for the sector. Ignoring Premier Oil for the time being, the yield range is 2.79 per cent to 6.63 per cent, which is quite a significant range.

The price earnings range is from 8.0 x to 12.6x, roughly a 50 per cent premium from top to bottom. We will eliminate Royal Dutch Shell 'A' shares to avoid covering the company twice. We included them initially to highlight the fact that the ‘B’ shares are more tax efficient for UK investors. The ‘A’ shares carry a slight yield advantage which reflects the differing tax treatments.

Interestingly, three of the top four yielders have dividend cover below two and we will eliminate all of them on the grounds of low-ish cover. The lower cover gives less scope for dividend increases and as we like to look forward not back, dividend increases are the most likely way for investors to protect their capital. So, Enagas, Gas Natural and Repsol are all eliminated on grounds of cover and they all have relatively high PE ratios. Occidental Petroleum looks a little pricey and the yield is not great so it too is removed from the list.

Broker recommendations

That leaves us with Royal Dutch Shell 'B', Premier Oil and BP from the UK; Total from the Eurozone and from the US, Chevron, Exxon Mobil and ConocoPhillips. I am looking for one UK, one eurozone and one US stock to make up the shortlist and at this point elimination becomes difficult.

What are the brokers saying about the seven survivors? The table above represents the number of brokers in each of the recommendations categories of buy/hold/sell.

It is noticeable that Premier Oil has just paid its maiden dividend of 5p as a final dividend last June. The current average analysts forecast are for a dividend of approximately 3p for the year to December 2013. With the strong cover, we find a reduction in the dividend an unlikely prospect. However, the yield is currently too low to be dividend of the week.

Company fundamentals

Rightly or wrongly, we will eliminate BP on the grounds that the fallout from the Deepwater Horizon spill is not yet fully settled. Plus you can’t get away from the fact that it has cost BP a great deal of money. Provisions in the accounts may prove too high or too low. It is this uncertainty that puts me off BP So we will go with Royal Dutch Shell.

In the US, we are going to go with the brokers and also on the grounds of lower valuation and select Chevron. Total goes through, being the only European stock left standing, although to be fair, it is quite well supported by the brokers.

Shortlisted companies

Let's have a look at the dividends paid by each company over the past six years:

As with previous dividends of the week, we are left with a difficult choice and the table below illustrates how close the call is.

It really is going to have to be up to readers in the end and your own attitude to buying shares outside the UK. Do you want direct euro or US dollar exposure? Our aim, with Dividend of the Week, is to provide the reader with, at the very least, a choice; it won't always be the case that we all agree on the final selection.

Clearly in terms of recent historical dividend growth, the greater dividend cover and forecast dividend growth, Chevron is the clear winner, but are you happy to pay for that with a 25 per cent premium in terms of the PE and a significant yield discount to Royal Dutch Shell? I would say yes in this case and so for the first time an international stock makes dividend of the week. Its recent share price history shows a high of 12,776¢ and the shares currently trade at 12,250¢, with a 52-week low of 10,162¢.

Chevron

Royal Dutch Shell looks very cheap at the moment and for the investor, the only difficulty is finding the downside. Clearly, a plunging oil price would not help matters, but this is unlikely and would affect all of the stocks in this analysis adversely. Shell's recent share price history shows a high of 2,365p and the shares currently trade at 2,181p, with a 52-week low of 2,098p. The company also has a strong share buyback operation that will result in purchases of around $4bn (£2.59bn) this year.

Royal Dutch Shell 'B'

*Note that the exchange rate has not yet been set and that this is an estimate based upon the prevailing exchange rate

It should be noted that if direct exposure to the euro is required that there is a euro version of the Royal Dutch Shell stock available on the Amsterdam Stock Exchange.

Total also looks very good value. Its recent share price history shows a high of 4,184¢ and they currently trade at 4,025¢, with a 52-week low of 3,525¢.

Total

Total have not yet reported 2013 Q1

For Chevron, we are estimating the next six dividends to be 100¢, 100¢, 100¢, 105¢, 105¢, and 105¢. They were at 12,307¢ at Friday’s close. At 12,307¢, this will generate a return of 3.94 per cent annualised over a 15-month period. 

■ IC fundamental view: As Mark says, there’s always room for an energy income play within your portfolio, particularly now that there is a greater emphasis on returning capital to shareholders within the wider resource sector. Worries on the China slowdown and the expansion of US shale have weighed on the oil price since the start of the year, which means that many of the oil majors are trading at historically low multiples.