The energy sector is out of favor today, with oil prices hovering in the $50 to $60 range for most of the last year. It's tough for some oil and natural gas companies to make money at that price, which has left investors understandably downbeat. However, not all energy companies are the same. Here are three industry giants that can weather this test while still expanding their businesses for the future. And, while you wait for oil prices to rebound, you can collect their generous dividends along the way.
1. Spending big money
ExxonMobil (XOM) is among the largest companies in the world, with a roughly $290 billion market cap. Today it sports a yield of 5%, near the highest level in the last 30 years. The globally diversified and integrated giant has increased its dividend for 37 consecutive years at this point. This isn't the first time Exxon has lived through a difficult oil market and continued to reward investors for sticking around.
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One of the key takeaways from any review of Exxon should be that it is a conservatively run company. One of the places that shows up most prominently is on its balance sheet. The company's financial debt to equity ratio is 0.15 times, one of the lowest levels of its direct peers. It covers its trailing interest expenses by over 20 times. Exxon has the financial foundation to weather a downturn.
In fact, beyond just getting through this weak spell, Exxon is actively working to reposition itself for better days. That includes investing as much as $35 billion a year in new upstream (drilling) and downstream (processing and chemicals) assets. It is also selling older assets that it believes aren't as desirable as the ones it is currently building, improving the quality of its diversified business as it helps to fund its capital investment plans.
It may not be easy to sit back and watch Exxon work through this downturn, but you'll get paid very well while you do. And history suggests that Exxon will come out the other side a stronger company.
2. Benefiting from past spending
Chevron Corporation (CVX 0.67%) is the next name on this list. With a market cap of $220 billion or so, it competes directly with Exxon. Chevron's yield, however, is a bit lower at around 4%. There's a good reason for that; Chevron's production has been growing over the last couple of years as capital projects it has put in place play out (Exxon's production has only recently started to turn higher). The timing here couldn't have been better since Chevron is in a position to spend just $20 billion or so a year on its capital investment program at a time when money is tight. And, despite the lower spend than peer Exxon, Chevron projects production growth to come in at around 3% to 4% annualized through 2023. Investors have a more favorable view of Chevron today than Exxon, and for good reason.
Meanwhile, like Exxon, Chevron has a very conservative balance sheet. Financial debt to equity is roughly 0.15 times, and Chevron covers interest expenses by roughly 20 times as well. Chevron is built to weather adversity like what it is seeing today. And management is also using this period to high-grade its portfolio, selling assets that it thinks are less desirable than what it has in the development pipeline.
XOM Dividend Yield (TTM) data by YCharts
Dividend investors, meanwhile, will like that Chevron has increased its dividend annually for 32 consecutive years. While the company's dividend record isn't as good as Exxon's, Chevron has clearly continued to reward investors even during difficult markets. And with a fortress of a balance sheet, there's no reason to expect that to change. Meanwhile, investors can collect a historically high yield while they wait for the oil market to strengthen.
3. Playing the middle ground
Last up is something that's a bit more focused, Enterprise Products Partners (EPD 0.62%). This master limited partnership owns a massive collection of midstream assets. These are the pipes, storage, transportation, and processing assets that help get oil and natural gas from where they are drilled to where they eventually get used around the world. With a $56 billion market cap, Enterprise is one of the largest domestic players in the space. It is also one of the most diversified.
The partnership has long taken a conservative approach, preferring to be a slow and steady tortoise. For example, its debt-to-EBITDA ratio of 3.3 times is among the lowest of its peer group. And it covers its distribution by an incredible 1.7 times (1.2 times is considered strong coverage in the midstream space). Enterprise's distribution is very secure, though this is partly a function of management's efforts to self-fund more of its own growth. To do this it chose to slow distribution growth into the low single digits for a couple of years, using the freed-up cash to shift its model. Once the transition is over, which should be in a year or two, distribution growth will likely increase back into the historical mid-single-digit range.
XOM Dividend Per Share (Quarterly) data by YCharts
Speaking of the distribution, Enterprise's yield is a hefty 6.7% today. That's not the highest level it has ever been, but it is more than double its yield at the end of 2014. A big part of that change is because the unit price has fallen on hard times, of course, but that hasn't stopped the distribution increases from continuing to roll along. Enterprise's streak of annual hikes is now up to 22 years.
The best part is that most of the company's revenue comes from fees for the use of its assets, so volatile oil prices aren't that big of a concern here. In other words, if Exxon and Chevron aren't a good fit because of their commodity exposure, then high-yield Enterprise might be right up your alley. As for growth, Enterprise has roughly $9 billion worth of projects under construction today to help keep the distribution marching higher.
Dividends in ugly places
It would be hard to suggest that the energy industry is flying high, considering that oil prices have been whipsawing in and out of bear markets lately. But that shouldn't lead you to avoid the sector completely. It just means you need to look for companies that have the wherewithal to make it through tough times. Exxon, Chevron, and Enterprise all fit that bill...and come with fat dividend yields that will pay you well while you wait for the energy industry to see better days.
