One key advantage that individual investors have on Wall Street is time. Institutional investors often have to prove their worth quarterly, or even more quickly. Individuals can put money into an out-of-favor stock or sector and wait for things to improve, even if it takes a while. The energy industry is a great example of this dynamic today. There are some truly wonderful companies in the sector, but investors with short time horizons aren't willing to touch them. If you can afford to sit around and collect fat dividends, here are three energy names that you might want to look at right now.
1. The mighty giant
First up is U.S. integrated oil major Chevron (CVX -0.69%). The term "integration" here means that the company's business spans from the upstream (oil and natural gas drilling) space all the way to the downstream (refining and chemicals) area. Although the entire industry is out of favor today, having this broad reach has historically provided Chevron's business balance. Its size, meanwhile, allows it to take on projects that smaller companies couldn't handle.
That said, there's another reason to like Chevron -- its balance sheet. With a financial debt-to-equity ratio of roughly 0.15 times, it is, financially speaking, one of the strongest in its peer group. That provides the company with staying power that more leveraged peers lack. When times are tough, like they are today, it can use its financial strength to continue investing in its business while still rewarding investors with fat dividends. The dividend has been increased annually for more than 30 years, and the current yield is a generous 4.6%.
There's one last thing to note about Chevron. It is still investing in its business, but compared to its cash flow this spending is lower than any of its major peers. Past investments, meanwhile, are still paying off with low-to-mid single digit production growth expected to last through 2023. While other oil and natural gas companies are pushing huge amounts of cash out the door to sustain production growth, Chevron is able to pull back spending, continue to grow, and pay investors well for sticking around.
2. Dipping a toe in the water
The next name to look at is France's Total S.A. (TTE 0.93%). Before getting too far into it, this global energy giant tends to make greater use of debt than Chevron, sporting a financial debt-to-equity ratio of roughly 0.45 times. That's not a huge number on an absolute basis or particularly out of line with its European peers. It is, however, toward the higher end of the peer group, since Chevron and ExxonMobil both tend to be fiscally conservative. It's one of the reasons why Total's dividend yield, at 5.9%, is over a percentage point higher than Chevron's. However, like many of the European oil giants, Total tends to carry much more cash on its balance sheet than Chevron or Exxon. With around $27 billion in cash and short-term investments and roughly $48 billion in long-term debt, it is in a much stronger financial position than it at first seems.
Total is continuing to invest in its oil business, like all of its peers, since the world is still using oil today and will likely continue using oil for many years to come. But management clearly sees the long-term writing on the wall and is starting to invest in electricity. A couple of years ago, for example, it spent roughly $1.6 billion to buy a European utility company. It is also investing in renewable power. The core of the business is still oil and natural gas, but it is using these cash cows to invest for a future in which carbon fuels aren't as dominant as they are today.
While, from a big-picture perspective, Total is roughly similar to Chevron, the small but growing electricity and clean energy business is a key differentiator. Long-term investors get the benefit of owning an out-of-favor oil major (note the fat dividend yield), but also some clean energy potential, as well. If you can stomach the higher level of leverage, that might be a good compromise.
3. Who cares about oil prices?
The last name up is completely different. Enterprise Products Partners (EPD -0.87%) is a master limited partnership that focuses entirely on the North American midstream space. Essentially, it owns the pipelines, ports, storage, and transportation assets that move oil from where it is drilled to where it eventually gets used. This is largely a fee-based business, with roughly 85% of Enterprise Product's gross margin tied to the use of its assets. The price of oil and gas doesn't really matter all that much, just demand for the still-vital fuels.
It is one of the largest and most diversified midstream players in North America, with a portfolio of assets that would be difficult, if not impossible, to replicate. Its size and reach allow it to take on investments, and sometimes acquisitions, that smaller peers couldn't even consider. Today it has nearly $8 billion worth of capital projects in the works that will help it grow its distribution. That's a big priority for management, which has increased its disbursement annually for more than two decades. The yield today is a robust 6.7%.
That said, Enterprise Products is one of the most conservative names in the midstream space. Its financial-debt-to-EBITDA ratio of around three times is near the low end of its peers. That's the norm, not a short-term aberration. And it covered its distribution by a massive 1.7 times in 2019. For reference, 1.2 times is considered strong in the midstream space. Enterprise Products Partners is a boring company, but it is built to throw cash off to investors while easily navigating the energy industry's ups and, as the case is today, downs.
Waiting can be hard
It's hard to invest when others are fearful, but that's a tried-and-true approach to finding great investments. The energy sector is out of favor today in a big way, noting that Chevron, Total, and Enterprise Products Partners are down 18%, 34%, and 36% from their respective 2014 highs (when oil prices peaked at more than $100 a barrel). However, with generous yields, dividend-focused investors that can think long-term are getting paid well to wait out this downturn. And with strong underlying operations, there's little reason to think these three energy players won't emerge from this rough patch at least as well positioned as they are today. In fact, it's likely they'll come out the other side even stronger.