The oil and natural gas sector is unpopular right now. But these energy sources remain vital to the global economy and will remain so for decades. There are supply and demand issues, as always, but these are short-term concerns that wax and wane over time. Offering big yields backed by large, diversified, and financially strong businesses, right now could be the right time to look at these two energy stocks.
1. Built to survive the ups and downs
ExxonMobil (NYSE:XOM) is among the largest integrated oil and natural gas companies in the world. Although oil drilling has the biggest influence on the company's performance, its business spans the upstream (oil drilling), midstream (pipeline), and downstream (chemicals and refining) spaces. That provides some balance to its top and bottom lines, since downstream operations tend to benefit from lower energy prices, as oil and gas are key inputs.
The company also has a long history of being fiscally conservative and thinking long-term. Today, long-term debt makes up less than 10% of the capital structure, leaving Exxon with a rock-solid balance sheet. It has plenty of room to use debt to support its capital spending and dividend if oil prices fall, just like it did throughout the deep oil bear market that started in mid-2014.
That's a good thing right now since oil prices have hit a rough patch and Exxon has plans to spend up to $35 billion a year through 2025. That money will go toward capital projects to grow production and expand its downstream operations. It is already starting to see notable results on the production front after a few weak years on the strength of just one of its key growth platforms (domestic onshore drilling).
Despite these positives, investors have punished the stock. The yield is a historically high 5%. And the company's price to tangible book value hasn't been as low as it is today since the late 1980s. There's no question that today's low oil prices will take a toll on Exxon's earnings results, but it is built to survive and prosper through these commodity swings. That makes now a great time for income investors with a long-term view of the world to consider buying the energy giant.
2. A shift for the better
Enterprise Products Partners (NYSE:EPD) is one of North America's largest midstream players. It operates a massive network of pipelines, processing facilities, storage, and transportation assets that few can match. Although this scale means that growth is likely to be slow since it takes big projects and acquisitions to move the needle, it also provides a consistency to the partnership's performance.
A big piece of the steadiness is driven by the fact that most of Enterprise's revenue is tied to fee-based contracts. This means that the partnership gets paid for the use of its midstream assets, making demand for energy more important than the price of oil and natural gas. This also puts Enterprise in a great position to grow, since North American energy production continues to expand and outstrip the midstream assets needed to move all of the oil and gas being produced.
That's the backdrop for the roughly $6 billion worth of capital investments Enterprise has in the works today. That should keep the partnership busy though 2020. Meanwhile, it shouldn't have any problem funding this spending, with debt to EBITDA of roughly 3.2 times -- toward the low end of its industry peer group. The partnership's distribution, meanwhile, was covered roughly 1.7 times through the first six months of 2019. A coverage ratio of 1.2 is considered good.
And Enterprise's yield is a robust 6.1%. That's a full 2 percentage points higher than it was back in 2014, when oil prices started to tumble and anything related to oil fell out of favor on Wall Street. With notable growth plans and a big yield, now is a good time for long-term, income-oriented investors to look at Enterprise.
A little bit contrarian
It can be hard to step into a sector that is out of favor like the energy space is today. But if you focus on large companies with diversified businesses that are also fiscally conservative, it can be worth the risk. High-yielding Exxon and Enterprise both look like buys today.