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Dividend envy: How Big Oil compensates for low growth

Source: CNBC

In their respective earnings reports, ExxonMobil and ConocoPhilips reported earnings that beat expectations. Then again, big energy names have had a good quarter overall: BP raised its dividend, while Royal Dutch-Shell also had a great number.

Exxon's oil and gas segment earnings outside the U.S. generated a billion dollars more than expected, boosted by a combination of higher crude prices, higher production, and a Canadian oil sands project. Downstream (refining), however, was notably weaker.

The problem with these big integrated companies is simple: the upstream (oil and gas) segments have lower revenue yet much higher margins. Downstream is the mirror opposite: much higher revenues with lower margins. Upstream activities generate roughly 80 percent of the earnings for the company.

With that said, it's almost impossible to grow a company of Exxon's size. They produce over 4 million barrels a day, and the decline rate is roughly 200,000—300,000 barrels a day, according to Oppenheimer. They need to find enough reserves, or buy companies, that produce 200,000-300,000 barrels a day just to stay even.

So if you are XOM, what do you do? You buy back stock and pay a dividend. They pay out about $1.0 billion a month in dividends, where the yield is 2.7 percent.

In comparison, the dividend yield of Conoco is 3.7 percent. Why the big difference between XOM and COP? Because XOM is the Mercedes of the oil world: you're paying more for the brand name. Look how low the dividend yield is compared to other major oils:

Exxon 2.7 percent

Chevron 3.2 percent

Conoco 3.7 percent

Royal Dutch 3.9 percent

BP 4.6 percent

Source: Oppenheimer

Still, you have to pay a higher dividend just to keep investors interested in holding these stocks. The large integrated oil names have not performed well in recent years because they cannot grow. Investors have moved away from conglomerates and into pure plays, like refining and marketing stocks.

True, these are value stocks, but most investors are looking for growth, not value.

--By CNBC's Bob Pisani

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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