The energy industry is getting crushed today by low oil and natural gas prices. A big piece of that is being driven by the economic shutdowns used to slow the spread of COVID-19, which caused demand to fall off a cliff. Survival is the name of the game for many energy names today, as the news gets filled with stories of bankruptcies and dividend cuts.
1. The best oil major?
Chevron is one of the largest oil and natural gas companies in the world, operating with an integrated model that spans from the upstream (drilling) to the downstream (chemical and refining) segments of the energy sector. Although the demand destruction caused by COVID-19 has left the entire energy ecosystem reeling, historically Chevron's diversified portfolio of assets has resulted in a more stable business. That's notable, since that the energy sector is highly cyclical.
This, however, isn't Chevron's killer advantage. Nor is the company's long history of paying a growing dividend in both good years and bad. With over three decades of annual dividend increases behind it, this oil major clearly believes in returning value to investors via dividends. In fact, as some of its peers are cutting dividends, during Chevron's second-quarter 2020 earnings conference call CFO Pierre Breber highlighted that supporting the dividend is one of the company's top financial goals. The yield is a heady 6.6% today, near the highest it's been in decades, suggesting that long-term dividend investors might want to take a close look here right now.
That brings us to one key fact that sets Chevron apart from its peers. Perhaps this will underwhelm you, but Chevron's killer advantage today is its rock-solid balance sheet. To put a number on that, the oil major's 0.25 times debt to equity ratio is the lowest among its peer group. In what is one of the worst industry downturns in recent history, Chevron has the financial flexibility it needs to muddle through without making overly drastic changes (like cutting its dividend). Royal Dutch Shell and BP have already trimmed their payouts, and there are very real concerns that ExxonMobil may have to follow suit. Of course, there's no way to predict the future, but with Chevron's balance sheet strength it has more room to maneuver than any other oil major, which is, indeed, a killer advantage in today's energy market.
2. The midstream giant
Now that the cat is out of the bag, it's obvious that Enterprise Product Partner's killer advantage is also a strong balance sheet. Its financial debt to EBITDA ratio of 3.7 times, while not the lowest in the industry, is at the low end of its peer group. That's historically where Enterprise has resided, because the master limited partnership is a conservatively run operation. In fact, in the second quarter Enterprise covered its distribution 1.6 times over, which is an extremely robust number that leaves ample room for adversity.
But like Chevron, Enterprise's financial strength is just the foundation -- there's a lot more to the story. For example, the partnership is one of the largest and most diversified names in the midstream space. It would be difficult, if not impossible, to replicate the portfolio of pipelines, storage, processing facilities, and transportation assets it has assembled. Equally important, nearly 90% of Enterprise's gross operating margin is tied to fees, which means that demand for oil and natural gas (and the products they get turned into) is more important than commodity prices. So if you don't like the commodity price risk inherent in Chevron's oil production business, Enterprise, which simply gets paid for the use of its assets, might be a good alternative.
To be fair, Enterprise isn't immune to the energy sector's downturn. Demand has, indeed, been weak, and the industry-wide pullback in spending will likely lead to slower growth. But with a roughly 10% distribution yield today, backed by a financially strong partnership, it might be worth giving up some growth for the material income stream on offer. The key, of course, is that Enterprise has the kind of balance sheet that should allow it to navigate today's choppy waters and come out the other side in one piece. Note, too, that it has over two decades of annual distribution increases under its belt, another indication that its conservative approach has panned out well for investors.
Sometimes boring is sexy
Few investors get excited about balance sheets because, generally speaking, they aren't nearly as exciting as earnings statements. But the balance sheet is the foundation on which the earnings statement is built. And when times are tough, like they are today in the energy sector, balance sheets start to matter a lot more. So, as boring as it might seem to some investors, Chevron and Enterprise are both benefiting from the killer advantage of a strong financial foundation. If you are a contrarian looking for a way to invest in the out-of-favor energy sector, that will be a pretty alluring trait today.