Oil prices have gone on a wild ride this year, taking most oil stocks with them. Crude, however, seems to have found its bottom and has recovered quite a bit of ground over the past month. That's leading many investors to consider buying oil stocks for the next leg of the rebound.
We asked some Fool.com energy contributors which ones they thought were the top options to buy right now. They chose oil behemoth Chevron (CVX 0.04%) and pipeline giants Enbridge (ENB 0.81%), Enterprise Products Partners (EPD 1.92%), and Pembina Pipeline (PBA 1.22%). Here's why they think this group could pay big dividends for investors who buy right now.
Best balance sheet in the biz
John Bromels (Chevron): Even though oil prices have moved above $30 a barrel in recent days, they're still at historically low levels. Oil companies are predicting months -- if not years -- of stagnant prices as oversupply, storage limitations, and reduced demand conspire to keep prices low.
That's why I think the best bets in the oil industry are the integrated majors. They have the size and strength to make it through the price downturn, and reward investors with dividend payments in the process.
I think Chevron is a top pick right now thanks to the strength of its balance sheet. The company has less debt -- on both an absolute basis and compared to its market cap or EBITDA -- than any of the other integrated majors. In addition, Chevron maintains a solid credit rating of Aa2/AA. That should enable it to borrow the funds necessary to support its dividend, which currently yields 5.4%, and which the company has increased annually for the past 33 years.
The oil industry is a risky place right now, but dividend investors can feel reasonably safe taking a stake in Chevron.
Back to the well (but not at the well)
Jason Hall (Enterprise Products Partners): The most dangerous place to invest in the oil patch right now is at the well. The companies that produce oil -- or work for oil producers in the oil field -- are the ones most at risk during the ongoing oil crash. Many simply won't survive this downturn.
That's why, despite having offered up Enterprise Products Partners already recently as an oil stock worth buying, I'm pitching it once again. Enterprise Products is far enough away from the well to avoid the worst of this downturn, but also in the sweet spot of offering the kinds of services that are still needed. The company makes money moving and storing hydrocarbons of all kinds, and even though the flow of oil has slowed, its customers still need Enterprise Products' services to keep their cash flows coming in.
There's also been increased demand for some services, including storage of crude oil and refined products. It's not enough to offset the drop in volume-related cash flows, but it's helping bridge the gap during the downturn, as is its balance sheet, which is one of the strongest of all the major midstream companies.
And to some extent investors have acknowledged how strong Enterprise Products should prove to be. Its unit price has surged 45% since bottoming out in late March; but even with this great run, it's still down 37% from its 2020 high and its dividend yield is still well above 9%.
Not only is Enterprise Products one of the best bargains in the oil patch today, I think it will prove one of the safest, too.
Good contracts, stable customers
Tyler Crowe (Pembina Pipeline): Because the oil and gas industry is so interconnected, looking at a company's financials isn't enough to determine if it is going to get through this downturn with minimal financial damage. The quality of its customers and their ability to pay the bills is a concern as well. That's what makes Pembina Pipeline look like an interesting oil stock these days: its business, its financials, and its customer base.
As of its most recent earnings report, Pembina noted that more than 90% of its revenue is from fees and has minimal commodity price exposure. What's more, about 70% of its total revenue comes from what are known as take-or-pay contracts. That means that its customers have to pay for Pembina's contracted services whether or not they actually use them. This revenue protection is only as good as the financials of its customers, though. Fortunately for Pembina, 80% of its customers have either investment-grade credit ratings or split investment-grade ratings (that is, one ratings agency says its investment grade, another doesn't).
With a reliable revenue stream, a manageable debt load, and a plan to defer $1 billion in capital spending between 2020 and 2021 to conserve cash, Pembina appears to have the foundation in place to weather this oil market storm in decent shape. With a dividend yield of 7.5%, it's one of the better buys in the oil and gas industry right now.
Stability amid the storm
Matt DiLallo (Enbridge): Canadian oil pipeline giant Enbridge operates one of the more reliant businesses in the oil patch. That was on full display during the first quarter as it didn't have any issues with crashing crude prices. That's because the company's contracts insulate it from fluctuations in volumes and pricing.
Given the overall durability of its business model, Enbridge expects to achieve its full-year cash flow forecast. Thus, it will generate enough money to cover its 7% dividend yield as well as the bulk of its expansion program. It can easily cover the balance with existing liquidity thanks to its strong balance sheet.
Enbridge's expansions have it on track to grow its earnings at an annual rate of 5% to 7% after this year. That should give it the fuel to increase its high-yielding dividend at a similar pace. This outlook suggests that Enbridge could generate total annual returns of 12% to 14% from here.
On top of that, Enbridge's stock has additional upside potential as it recovers from its nearly 20% dive after tumbling along with the oil market earlier this year. Add it all up and the pipeline giant offers investors a compelling blend of upside and income. That's a lot better than most oil stocks these days, considering that many face a real risk of going bankrupt.