Energy & Income

07/08/2005 12:00 am EST

Focus:

Carla Pasternak

Editor, The Income Investor

For those interested in the energy sector, but with an added focus on generating income, we turn to Carla Pasternak, editor of High Yield Investing. Here, she looks at a two dividend paying oil stocks, one with the added twist of "China" and the other an oil-tanker play.

"China-based PetroChina (PTR NYSE) controls most of that country's oil and gas reserves. The former state-owned energy company produces, refines, and transports most of the country's oil and gas. It also runs a large network of 15,000 gas stations across the country. With such a stranglehold over China's oil and gas resources, PetroChina is well suited to meet China's growing energy needs. Billionaire investor Warren Buffett thinks so too; he holds a significant stake in the company. PetroChina maintains a healthy balance sheet, with $3.16 per share in cash, which is more than ample to cover its generous $2.37 dividend.

"At just 10 times next year's earnings, the stock is trading at a discount to peers such as Royal Dutch and ExxonMobil, yet its 3.8% yield and strong growth outlook make PetroChina a more compelling choice. The stock is basically a play on China's explosive growth. If the Chinese economy continues its red-hot expansion, then PetroChina should do well. However, if the economy slows and demand falls, then the stock could be vulnerable in the short term. For income investors wanting to add international exposure, PTR is a good stock to watch.

"Greek oil tanker firm Tsakos Energy Navigation (TNP NYSE) appears to be in excellent shape. The stock is trading at just six times earnings and is yielding nearly 5%. Although it is by no means the biggest shipper, Tsakos boasts a fleet of 30 of the most modern tankers in the world. Almost all are double-hulled, giving the company a leg up on the competition, which will be required by law to replace their single-hulled ships with safer double-hulled ones by 2010. With more than half its fleet is under medium- or long-term contracts, Tsakos shows a fairly stable earnings stream. It also boasts a healthy balance sheet, with debt less than one times equity.

"An estimated one-third of the world's oil tankers are being removed from service, as single-hulled tankers no longer meet the United Nations International Maritime Organization requirements. And given that steel prices are near record highs and it takes at least two years to build a new vessel, these tankers will not be easy to replace. Growing demand and short supply should keep freight rates stable and provide a positive environment for well-positioned tanker firms like TNP. Of course, there are risks. Tanker stocks are not for the faint of heart, and share values can move quickly in either direction depending on changes in oil prices. Over the long term, however, we expect TNP to deliver above-average returns."

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