Looking for income? Why some oil stocks could now be worth the plunge

It has not exactly been a barrel of fun for oil investors this year, as energy stocks have lost around half their value this year as the pandemic has dried up demand for transportation and closed factories down across the globe. Coming into the year oil was at $50 a barrel, and after plummeting to a point in which oil was spiralling down to point in which it was trading negatively, is now sitting at just shy of $40.

Aside from the plunge in the oil price, investors in the energy space have also been hit with dividend cuts and suspensions as oil companies aim to shore up their balance sheets. For those seeking strong income yield in a low-yield environment, it has been a particularly tough time. Many investors have walked away from the sector as a result, but for those brave enough to revisit the space, there are some potentially very rewarding opportunities.

Take Chevron, one of the largest oil and gas producers in the world. They not only have a very strong balance sheet and a low level of leverage, but have also increased their dividend payout for each of the last 32 years, with the stock currently yielding 7.2%. Being able to sustain the dividend is by no means an easy feat - Apache and Noble energy have both cut their dividends heavily, with Marathon Oil suspending their dividend entirely. Global energy names have not had it any easier as Shell slashed its dividend for the first time since World War 2 and BP halving theirs.

For those willing to be even a little more adventurous in their quest for income, Exxon is another energy giant and currently yields 10.2%. Unlike Chevron, Exxon is using debt to fund its dividend payments, which does call into question the sustainability of the dividend. Although Morgan Stanley's Devin McDermott struggles to see how the dividend can be sustainable in the long-term given the funding via debt and views that an average oil price of $60 would be needed over the next five years to sustain them, Wells Fargo recently commented that they actually see the dividend being sustained through to 2023 - as long as there is not another collapse in the oil price. McDermott did also note that even if the dividend cannot be sustained, Exxon is doing the right things by being more aggressive on capital spending and better positioning themselves for a when the energy sector starts to recover.

Although the jury remains out on the long-term future for many names in the oil and energy space, there is little doubt for those looking for short or medium-term yield that Exxon and Chevron offer some of the most attractive prospects in the sector. For these to pay off, oil prices need to show the stability they have had since June, but there also needs to be a demand catalyst to take them higher. This means economies opening back up and Covid cases being brought under control - there is likely only limited upside should a fiscal stimulus be passed in Washington.

Again, as with so many parts of the market, so much depends on Covid cases. But should a medium-term perspective be taken and a view that we will soon be out of the woods and have a vaccine available, investors should not only be handsomely rewarded with sustained income - but capital gains as well.