Rising oil prices remind investors the importance of this key commodity. For all the talks of renewable energy, the world is still largely dependent on oil and gas for its energy needs. Oil and gas stocks have generated handsome returns for investors over decades.
Let's discuss some key factors driving oil prices lately, as well as three top oil stocks -- ExxonMobil (XOM -0.05%), Enbridge (ENB 1.09%), and Enterprise Products Partners (EPD 0.21%) -- to consider buying right now.
Oil inventories have fallen to the lowest level in a decade
Many factors affect global crude oil prices. That makes predicting oil prices a difficult task. Yet, an understanding of some key indicators help you understand oil price moves. To begin with, inputs to crude oil refineries continue to recover after a steep fall in 2020 when the coronavirus pandemic throttled the demand for oil products.
US Gross Inputs Used by Refineries data by YCharts.
According to the U.S. Energy Information Administration, the gross refinery inputs averaged 15.97 million barrels per day (BPD) for the week ending March 4. Though that's still lower than pre-pandemic levels, it has risen significantly from the lows in 2020.
U.S. crude oil inventories stand at 989 million barrels, the lowest levels in over a decade. When production and imports fall short of demand, crude oil inventories get used up. Clearly, falling oil inventories are bullish for oil prices.
US Crude Oil Field Production data by YCharts.
With growing demand and prices, oil producers are increasing production slowly, though it still stands at much lower level compared to 2019. Decreased capital spending from producers over the last few years has left the oil market undersupplied, contributing to the rising prices. As the graph above shows, imports are also rising back slowly to meet the growing demand from refineries.
In short, all the above indicators are bullish for oil prices. However, it is important to note that these are not the only factors driving oil prices -- and this is where uncertainty creeps in. Several other factors impact crude oil prices -- OPEC (Organization of the Petroleum Exporting Countries) policies, geopolitical factors such as sanctions on Iran, Russia-Ukraine war, and so on. Evidently, no one can control or predict these factors. Even in normal times, OPEC is seen as a wild card, and tiffs or disagreements between OPEC countries, as well as unclear policies, often lead to uncertain oil markets.
Image source: Getty Images.
That's why it makes sense to invest in stocks that can generate a handsome income for you, irrespective of oil prices. Both Enbridge and Enterprise Products fit the bill here. By comparison, ExxonMobil offers you a significant exposure to oil prices, helping you capture upside when prices rise. At the same time, as a huge and diversified company with operations from exploration to refining, ExxonMobil is better protected in down markets for oil compared to smaller pure-play exploration and production operators.
Diversified oil major: ExxonMobil
With operations dating back more than a century, ExxonMobil is one of the most well-known oil companies in the world. It drew investors' wrath in 2020 for its high capital spending in a down market that resulted in heightened debt levels as well as underinvesting in renewable energy. ExxonMobil also decided to maintain its dividend, further swelling up its debt.
However, as the demand for oil returned slowly, and oil prices strengthened, ExxonMobil addressed the debt concern on priority. In 2021, it paid down $20 billion of debt. The company believes focused investments during the down cycle allowed it to reap benefits when markets recovered. That allowed it to generate $23 billion in earnings in 2021 -- the highest among competition. Exxon has also started a $10 billion share buyback program.
ExxonMobil's commitment toward its dividend, despite an extremely challenging market, is what attracts income investors to the stock. Notably, the company's aggressive use of debt, as well as its dependence on oil prices, make its stock volatile.
Canadian pipeline operator: Enbridge
Enbridge has been generating steady cash flow for years. The company primarily operates liquids and natural gas pipelines. The capacity on Enbridge's liquids pipelines is usually in high demand, due to a limited takeaway capacity to transport oil from Canadian oil sands to the refineries along the Gulf Coast. At the same time, its regulated gas transmission and distribution operations generate utility-like steady cash flow.
Enbridge's steady cash flow permitted the company to raise its dividend for 27 straight years. The company continues to find growth opportunities and placed around $10 billion Canadian of capital projects into service in 2021. Enbridge expects that its capital projects will support 5% to 7% compound annual growth in its distributable cash flow per share from 2021 to 2024. That means investors can expect a steady income from this top dividend stock in the years to come.
Midstream giant: Enterprise Products Partners
With 23 straight years of distribution growth, Enterprise Products Partners offers a compelling opportunity for income-seeking investors. It operates over 50,000 miles of liquids and gas pipelines. It is also involved in gas processing and fractionation as well as export and import of energy commodities. Enterprise Products' diversified and strategically located assets, fee-based businesses, strong balance sheet, and experienced management are some of the key factors that provide it an edge over its smaller peers.
Enterprise Products Partners has one of the strongest balance sheets among oil companies. Its trailing-twelve-month debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio is healthy at 3.6 times. The ratio indicates a company's ability to pay back its debt obligations. A lower ratio is considered better.
Enterprise Products Partners' strong balance sheet positions it well for acquisitions to fuel growth. The company recently acquired Navitas Midstream Partners, which strengthens its position in the Midland Basin, a prime oil-producing region in Texas. Overall, Enterprise Products Partners is a top stock to add to your energy portfolio.
