3 Oil Stocks to Buy With Safe Dividends

Dividend Stocks

Oil has corrected from highs with concerns related to global economic growth. However, it’s unlikely that oil will witness a deep correction considering supply and geo-political factors. The surge in oil price has translated into swelling cash flows for oil and gas exploration companies. With dividend growth in the last few quarters, there are several oil stocks to buy with safe dividends.

Coming back to the outlook for oil prices, Fitch Solutions Country Risk & Industry Research believes that oil will average $105 per barrel in 2022. Further, oil is expected to trade at around $100 in 2023.

Even beyond this, Fitch does not expect a big correction in oil. Therefore, oil companies with an attractive break-even have strong free cash flow visibility for the next few years. This makes oil and gas stocks worth considering among safe dividend stocks.

If we look at another estimate, Goldman Sachs believes that oil is likely to average $125 per barrel in 2023. If this holds true, oil stocks will reward investors with robust dividends and handsome capital gains.

Let’s, therefore, talk about three oil stocks to buy with safe dividends.

Ticker Company Price
CVX Chevron $157.78
OXY Occidental Petroleum $63.18
MRO Marathon Oil $23.34

Chevron (CVX)

chevron stock

Source: LesPalenik / Shutterstock.com

Chevron (NYSE:CVX) is deservedly at the top of this list of oil stocks to buy with safe dividends. Currently, CVX stock has a dividend yield of 3.5%. Considering the factors of a strong balance sheet and robust cash flows, dividends are sustainable.

To put things into perspective, Chevron reported an operating cash flow of $13.3 billion for the second quarter of 2022. This implies an annualized cash flow potential of around $50 billion. Even with the recent oil price correction, OCF is likely to be well above $30 billion.

This provides Chevron with ample flexibility for dividends, share repurchase and aggressive investments. The company plans to invest $15 to $17 billion annually over the next few years. Meaningful investments will also ensure that the reverse replacement ratio remains robust.

With a strong balance sheet, Chevron has also been investing in renewable energy. This is likely to make the business more diversified in the next decade.

Occidental Petroleum (OXY)

A magnifying glass zooms in on the Occidental Petroleum website.

Source: Pavel Kapysh / Shutterstock.com

Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) currently holds a 20.2% stake in Occidental Petroleum (NYSE:OXY). The legendary investor is known for picking long-term value creators and I also believe that OXY stock is worth holding.

Currently, Occidental offers an annualized dividend of 52 cents, which translates into a yield of 0.44%. If oil sustains above $80 per barrel, I expect dividend growth in the coming years.

A key reason is that Occidental is focused on deleveraging. For Q2 2022, the company retired $4.3 billion in debt. With a stronger balance sheet in the next few years, there will be headroom for higher dividends and share repurchases.

In terms of assets, Permian is likely to remain the cash cow for the company. Additionally, the company has deep-water exploration opportunities in Latin America. With an improving balance sheet, the company is also positioned to increase investments in low-carbon ventures.

Marathon Oil (MRO)

Marathon Oil Logo at the top of a mobile device.

Source: IgorGolovniov / Shutterstock.com

Marathon Oil (NYSE:MRO) is another name among oil and gas stocks that have surged in the last 12 months. The company also offers an attractive dividend yield of 1.26%. I believe that MRO stock can be accumulated on corrections.

A key criterion for selecting oil stocks to buy with safe dividends is the level of free cash flow. Marathon Oil reported an adjusted free cash flow of $1.2 billion for Q2 2022. This implies an annualized FCF potential of nearly $5.0 billion.

From an asset perspective, Marathon is primarily an oil and gas play with a focus on North America. At the end of 2021, the company reported proved reserves of 1,106 million barrels of oil equivalent (mmboe).

On a year-on-year basis, proved reserves increased by 14%. A robust reserves base provides stable production visibility. As financial flexibility increases, the company will be positioned to accelerate exploration investments.

Overall, Marathon is positioned to sustain dividends even at $60 per barrel WTI. If oil trades around $100 per barrel, further dividend growth seems likely.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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