What energy stocks should you buy in the middle of an energy crisis?
It might be smartest to avoid the sector entirely, but if you're an investor who doesn't mind a bit of risk, there are certainly plenty of beaten-down stocks here to consider. COVID-19 has decimated the travel industry -- and the oil industry that fuels it. Meanwhile, overtaxed governments are taking a hard look at their budgets and policies, which could have an impact on clean energy stocks moving forward.
With so much inherent risk in the industry right now, energy investors should opt for the most reliable stocks within it. Here's why you might want to take a closer look at ExxonMobil (NYSE:XOM), Brookfield Renewable Partners (NYSE:BEP), and Enbridge (NYSE:ENB).
ExxonMobil has been paying a dividend since it was formed through the merger of Exxon and Mobil in 1998. Since then, it's increased that dividend every year. If you factor in pre-merger dividends, the company has rewarded investors with annual payout increases for the last 37 years.
That makes ExxonMobil a Dividend Aristocrat, and it has one of the best track records in the energy industry. Luckily for investors, that commitment to the dividend looks set to continue, even in this era of sharply lower oil prices. The company has announced a 30% reduction in its 2020 capital spending budget to free up cash to devote to its dividend. If that's not enough, Exxon can always rely on its strong credit rating and solid balance sheet to keep the payout funded until oil prices recover.
With a current yield of 8.8%, ExxonMobil looks like one of the few worthwhile picks in the oil industry right now.
Let's move as far from the troubled oil industry as possible, and check out Canadian master limited partnership (MLP) Brookfield Renewable Partners. It's one of a family of companies managed by the capable folks at Brookfield Asset Management (NYSE:BAM). As its name implies, Brookfield Renewable owns renewable energy assets -- primarily hydroelectric dams, but also solar and wind farms in 15 different countries.
The MLP also owns a majority stake in fellow renewable energy generator TerraForm Power (NASDAQ:TERP), which exclusively focuses on solar and wind farms in the Americas and Europe. On March 18, Brookfield announced it was buying the 38% of TerraForm that it doesn't already own, combining forces into a $50 billion renewable energy juggernaut. At 36 gigawatts of generation capacity, it will be one of the largest generators of renewable power on the planet.
It will also churn out gobs of cash: Brookfield and TerraForm make money primarily by selling their electricity to customers through long-term, fixed-rate contracts that guarantee predictable cash flow. Over the years, that cash flow has grown for both companies; TerraForm's really began to take off after Brookfield first took a stake in the company in 2018:
That kind of reliable cash generation comes at a premium price; even with shares knocked down a bit by the recent market slide, Brookfield isn't cheap. But with a 4.5% yield, a sterling track record, and a bright future ahead in conjunction with TerraForm, Brookfield Renewable Partners looks like a buy.
Reliable cash flow
Canada's Enbridge is a hybrid company of sorts. It's primarily a pipeline company that derives about half of its EBITDA from transporting crude oil through its extensive North American pipeline network. Almost all of the rest of its income comes from natural gas: Enbridge both transports it and distributes it as the third-largest natural gas utility in North America by customer count. Finally, the company has a small renewable power business that owns about 2 gigawatts of solar, wind, and geothermal assets in North America and Europe.
Having so much exposure to North American oil and gas might seem like a liability right now, but even if the company has less oil and gas to transport in the coming months, it may not matter much. That's because Enbridge's pipelines primarily operate on long-term take-or-pay contracts, in which customers pay for pipeline capacity regardless of whether they use it of not. In fact, 98% of Enbridge's cash flow comes from these or other secure (regulated or cost-of-service) sources.
Considering Enbridge's dividend yield has shot up to 7.7%, you might worry that it could be at risk of a payout cut. However, the company has a strong balance sheet and an investment-grade credit rating, which should be sufficient to weather the current situation without a cut. Enbridge looks like a solid pick this month.
Energy prices have been volatile in 2020, and with the current economic situation, that's unlikely to change anytime soon. Given all the turmoil in the broader stock market, investors should expect that any energy industry stock they buy might see short-term losses...maybe even extreme losses.
However, over the long term, reliable companies like ExxonMobil, Brookfield Renewable Partners, and Enbridge are well positioned to be winners. That makes them some of the best energy stocks to buy in an unstable market.