The pandemic led to a steep drop in demand for oil and natural gas, pushing prices down and leading to a drop in capital spending throughout the energy sector. As global growth recovered, demand outstripped supply and pushed prices higher.
Geopolitical issues now have investors worried that supply will be even harder to come buy, with energy prices hitting triple digits. If that has you interested in the energy space, you'll want to check out industry giant ExxonMobil (XOM 0.57%), Canadian oil sands expert Suncor Energy (SU 1.40%), and Enterprise Products Partners (EPD 0.56%), all of which still have stock prices below $100 per share.
1. Bigger and getting better
Exxon is one of the largest oil and natural gas companies in the world, with a huge $360 billion market cap. It also offers a generous 4.2% dividend yield. But what's most interesting about its business is that its globally diversified and integrated model is built to survive the industry's inherent ups and downs.
Notably, it was able to support its dividend and continue to invest in its business right through the difficult early days of the pandemic. In fact, this Dividend Aristocrat actually increased its dividend each year during this period, and its streak of annual hikes is now at 39 years.
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Exxon is no slam-dunk investment, however. It entered the pandemic with a weak production profile and high spending plans to fix the issue. Like its peers, it was forced to cut that spending back, and it isn't looking to get too aggressive now that energy demand has come back. So production needs to be monitored closely, as does the company's efforts to go green, which have been lagging many of its closest peers.
Meanwhile, it used debt to fund its business during the 2020 downturn, so leverage is historically high, too, though well below the pandemic peak. Which gets to the real story here, now that energy prices are high: All of the issues Exxon faces get easier to deal with when cash flows are gushing in. For long-term income investors with a conservative bent, it could be a good portfolio addition.
2. A low break-even level
Canada's Suncor is a much smaller company, with a market cap of roughly $45 billion. Historically it was a producer of oil from the Canadian Oil Sands. Essentially, the company mines oil-drenched earth and processes it to extract the oil. This is very different from drilling for oil, particularly the fracking process that has grown materially in the United States.
Creating an oil sands mine is expensive, but once it is up and running, costs are modest and the reserve life is much longer than that of a fracked well. Notably, Suncor believes it can cover its operating costs and dividend with West Texas Intermediate crude priced at just $35 per barrel. It also thinks it can push that break-even cost even lower over time.
Like Exxon, the company has downstream operations to process the oil it produces. Right now, that's not such a great thing, given rising oil prices. But the energy industry is cyclical in nature, so, eventually, this business will benefit and likely right when its production business is seeing a performance pull back. It's the same type of business diversification that makes Exxon attractive, just on a smaller scale.
With Suncor's 4% dividend yield, investors looking for an oil name with low costs should like what they see here. That said, it's probably a bit more risky than Exxon, so risk-averse investors might be better off elsewhere.
3. A different way to play
The last name up is master limited partnership Enterprise Products Partners, a North American midstream giant. Basically, it owns the pipelines, storage and processing facilities, and transportation assets that move oil and natural gas -- through the refinement process to where they eventually get consumed. The key here is that Enterprise's business is largely fee based, so the price of the commodities it transports is less important than the demand for those products.
Today, Enterprise has a generous 7.3% yield. That dividend has been increased for more than two decades as well, including right through the pandemic. And Enterprise's distributable cash flow covered its payout by a hefty 1.7 times in 2021. That means there's a lot of room for adversity before the distribution is at risk. For conservative types who can't handle the inherent volatility of the oil market, Enterprise could be the best option. And like the other two names here, its stock is below the $100 mark.
Three ways to play
If you are looking to buy an oil name today, ExxonMobil is a good way to get broad and balanced exposure to the energy space. Suncor is a smaller name that benefits from a consistent and low production price. Enterprise, meanwhile, sidesteps the volatility in the energy space and provides a secure and lofty yield. Exxon and Enterprise are solid options for low-risk investors, but have different levels of exposure to commodity prices. Suncor is a bit more aggressive, given its smaller size and lack of diversification compared to Exxon.
