Buy These 3 Oil Stocks as World Tensions Rise

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When geopolitical risk rears its ugly head, it typically rattles the stock market. Renewed tensions with North Korea could cause a spike in geopolitical risk. If this happens, investors can expect the stock market to take a step back from its record highs.

At the same time, this could benefit the energy sector. Heightened geopolitical risk could result in higher oil prices, which would be great news for many beaten-down energy stocks and oil dividends.

Three oil stocks in particular are looking like attractive buys in an environment of elevated geopolitical risk. The oil company dividends are particularly attractive for dividend investors; these three companies offer dividend yields of 3% to 7%.

Oil Dividends: Occidental Petroleum (NYSE: OXY)

Occidental is an oil and gas exploration and production company. It has very high-quality assets, particularly in the Permian Basin, where it is the largest producer. The Permian Basin is arguably the strongest oil field in the entire U.S., and is one of a select few that produces more than 1 million barrels of oil per day. Occidental has more than 2 million acres in the Permian alone.

Occidental has been among the hardest hit from falling commodity prices, but in turn, would be one of the biggest winners if oil prices spike. Occidental grew total production by 6% last quarter, due to 7% production growth in the Permian.

At the same time, Occidental’s chemicals and midstream businesses are performing well. Occidental’s earnings from chemicals increased 35% from the previous quarter. Midstream earnings rose to $119 million last quarter, which reversed a $47 million loss in the first quarter.

Occidental has significantly cut spending to keep cash flow afloat. It cut capital expenditures by almost 50% last year, which provided for more than $2 billion of free cash flow for the year. This has allowed Occidental to keep paying its dividend, and raising it each year. The oil dividends company recently hiked its dividend for the 17th consecutive year, and the stock currently yields 5.2%.

Oil Dividends: Phillips 66 (NYSE: PSX)

As an oil refiner, Phillips 66 takes crude oil and processes it into gasoline, diesel  and other fuels. It operates 13 refineries, 11 of which are located in the U.S.  Collectively, its refineries hold more than 2 million barrels of processing capacity.

Phillips 66’s assets stretch across the U.S., and have access to some of the premier refining areas of the country. Total earnings rose 23% over the first six months of 2017, to over $1 billion.

Refiners tend to benefit from oil price volatility. In other words, they have the ability to capitalize on big changes in the price of oil, in a relatively short amount of time. Phillips 66 averaged 98% utilization last quarter.

The company’s growth will accelerate, because Phillips 66 has completed several major turnarounds ahead of schedule this year. Project expansions will also help grow future earnings. For example, its new Freeport LPG Export Terminal has capacity for 150,000 barrels per day.

Oil dividends are key. With its strong earnings, Phillips 66 returns a great deal of cash to shareholders. Since its spinoff five years ago, Phillips 66 has increased its dividend by 30% each year. It has also repurchased 131 million of its own shares, representing a 20% reduction in its share count.

In terms of oil dividends, Phillips 66 has a 3.4% dividend yield, and recently increased its dividend by 11%.

Oil Dividends: BP (NYSE: BP)

Lastly is U.K.-based integrated major BP. BP has one of the highest dividend yields in its peer group, at 7%.

As an integrated company, BP has a large refining business in addition to its exploration and production business. This diversified business model has allowed it to hold up better than many others in the oil and gas industry, with crude oil struggling to stay above $50. For example, BP’s earnings-per-share fell 9% last quarter, but the company beat analyst expectations.

BP is one of the largest energy companies in the world, giving it the scale to cut costs. The company expects to cut capital spending by $2 billion to $4 billion this year, compared with 2015 spending levels. BP is also raising cash with asset sales. It expects divestments of $5 billion this year, which helps it maintain its hefty 7% dividend yield.

BP is securing its dividend payout by cutting costs to lower its breakeven price. For example, BP’s current breakeven price is $47 per barrel. Lower costs helped operating cash flow grow by 30% last quarter. Going forward, new projects are expected to add 1 million barrels of new production capacity over the next four years. This will help BP grow cash flow even further.

Disclosure: The author is personally long BP.