The global economy is moving away from fossil fuels and toward renewable energy. However, the transition won't happen overnight. Because of that, even though all the talk these days seems to focus on renewables, we still need companies that produce, process, transport, and store fossil fuels.
We asked some of our energy contributors what companies will likely continue playing a vital role in the energy market even as we slowly shift toward cleaner power sources. Three that they think stand out are energy infrastructure giants Enterprise Products Partners (EPD) and Kinder Morgan (KMI 0.17%) and oil behemoth Chevron (CVX -1.10%).
The toll bridge owner to this important bridge fuel
Matt DiLallo (Kinder Morgan): Wind farms and solar panels are all the rage these days. That's because these emissions-free power generating assets hold the promise of a cleaner future. However, they're not without issues. The biggest drawback to those renewable energy assets is that they produce intermittent power because the sun doesn't shine all the time and the wind isn't always blowing. While energy storage holds the promise of generating near-firm renewable energy, it adds to the cost.
A cheaper way to produce steady cleaner power is natural gas. Because of that, many see it as a vital bridge fuel to help reduce greenhouse gas emissions until emissions-free alternatives like green hydrogen are commercially viable on a large scale. Given that, the world needs companies that produce gas as well as those that process, transport, store, and export this essential fuel.
Kinder Morgan is one of the leaders in operating the infrastructure needed to support the natural gas market. The company currently operates the largest natural gas network in North America, with more than 70,000 miles of pipelines. Those pipelines act as the toll roads needed to move gas across the country. Kinder Morgan gets paid a fee as that happens, enabling it to generate lots of cash flow.
The company currently pays out half its cash flow via a dividend that yields an eye-popping 6.8%. Meanwhile, it allocates the rest toward expansion projects, debt repayment, and share buybacks. While most of Kinder Morgan's near-term growth is in expanding its fossil fuel infrastructure, the company is slowly transitioning to the future of energy. That makes it a more compelling long-term investment, especially for those focused on generating passive income.
Solid as a rock
Reuben Gregg Brewer (Chevron): Although renewable power will likely be the growth engine in the energy sector for decades to come, that doesn't mean that carbon-based fuels are going away. In fact, some, like oil and natural gas, will remain vital to the world for decades because they are so deeply entrenched in the global economy. However, given the shift to clean energy, investors should probably err on the side of caution and stick with the biggest and best names in the space, like integrated energy giant Chevron.
The company remains committed to oil and natural gas, unlike some of its peers, which are starting to hedge their bets. That makes Chevron a better pure play in the carbon fuel space. Meanwhile, it has exposure from the upstream (exploration and production) to the downstream (chemicals and refining), providing diversification to its business. Its dividend, which the company has repeatedly explained is a top priority, provides a generous 5.6% yield. And, perhaps most reassuring, its debt-to-equity ratio of 0.26 times is the lowest of its peers.
Chevron will have to work hard to stay an industry leader in the energy sector. But when you look at the big picture, it appears well positioned to do that even as the world increasingly relies on alternative options.
Strong cash flows offer a cushion of safety
Neha Chamaria (Enterprise Products Partners): Clean-energy transitions may have started to affect the oil industry, but demand for carbon fuels isn't going away anytime soon. Then again, volatility in the oil market, like we saw in 2020, can be rattling. But fluctuations in the price of oil don't affect every oil stock the same way. Oil exploration and production companies are typically hit the hardest when oil prices fall as it directly hits operations. ExxonMobil, for example, expects to write down upstream assets worth nearly $20 billion in the fourth quarter.
Comparatively, companies that process, transport, and store hydrocarbons, also known as midstream oil and gas companies, are somewhat insulated from fluctuations in oil prices as they generate the bulk of their income from fee-based contracts. Consider Enterprise Products Partners, which operates nearly 50,000 miles of NGL, natural gas, and crude oil pipelines.
Evidence of how resilient this company's business is lies in its dividend profile: Enterprise has increased its dividend every year for more than two decades now. Credit goes to a diverse midstream portfolio that can generate steady cash flows. So for example, Enterprise generated $4.8 billion in distributable cash flow during the nine months through Sept. 30, 2020, that comfortably covered its dividend by 1.6 times. The company now expects to scale back capital spending and shift focus to building a stronger balance sheet while supporting dividends and share repurchases. That sounds like a plan, which when combined with Enterprise's 8.7% dividend yield, makes for an enticing bet.