The energy industry can be a turbulent place for investors. Commodity prices are volatile, which can have a big impact on some energy companies. Meanwhile, the industry faces an uncertain future as climate change has the economy transitioning to cleaner fuel sources.
However, some energy companies have built their businesses to withstand turbulent times within the sector and broader economy. Three of these durable energy stocks are Enbridge (ENB 0.20%), Brookfield Renewable (BEPC 2.75%) (BEP 2.85%), and Enterprise Products Partners (EPD -0.31%). Here's why these Motley Fool contributors think they're ideal ones to hold when times get tough.
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Totally prepared
Reuben Gregg Brewer (Enbridge): With a 27-year streak of annual dividend increases and a hefty 5.8% dividend yield, Canada's Enbridge is a very enticing income investment. But the real key here is the business model backing those dividend statistics.
Enbridge is largely a midstream energy company owning a portfolio of oil and natural gas pipelines. These assets move oil and natural gas around North America, with the company collecting fees for their use. Oil comprises 58% of earnings before interest, taxes, depreciation, and amortization (EBITDA), while gas makes up 26%.
The prices for these carbon fuels are not as important to Enbridge as the demand for them, which recent geopolitical events have proven remains significant. In addition to the pipelines, Enbridge also owns a natural gas utility (12% of EBITDA) where demand and investment generally avoid the impact of market and economic shifts.
So, regardless of what's going on in the world, Enbridge will likely continue to generate hefty cash flows and pay significant dividends. But what about the world's shift toward renewable energy? The remaining 4% of the company's EBITDA is dedicated to clean energy, with a trio of large offshore wind-power projects scheduled over the next few years in Europe. These investments will materially increase the company's clean power generating capacity. Oh, and these projects mean that the clean-energy segment will get 33% of Enbridge's currently scheduled capital investment dollars. This is not a sideline business.
Indeed, Enbridge is well positioned to weather the ups and down of the energy industry today, and it is using the cash from these businesses to reward shareholders with fat dividends while, at the same time, investing for a cleaner future. It seems like Enbridge is well prepared for whatever comes its way.
A durable business model
Matt DiLallo (Brookfield Renewable): Brookfield Renewable built its business to thrive in any market environment. The company's poured a rock-solid foundation by owning a large-scale, globally diversified renewable energy portfolio that includes hydropower, solar, wind, and energy-storage operations. This diversification reduces risk while providing Brookfield with multiple avenues to power future growth.
The company further reduces risk by selling the bulk of the power it produces under long-term, fixed-rate power-purchase agreements with end users like utilities and large corporate customers. These agreements supply it with steady cash flow to fund its dividend and expansion projects.
Brookfield Renewable estimates it can grow its dividend by 5% to 9% per share each year. Powering the company's forecast is its enormous backlog of expansion projects, inflation-linked rate increases, and its ability to leverage its growing scale to improve its margins. Brookfield estimates these growth drivers will expand its funds from operations per share by 6% to 11% per year through at least 2026. Finally, Brookfield sees the potential for acquisitions to add another 9% to its bottom line each year.
The company has one of the strongest balance sheets in the renewable energy sector to support its growth-related investments. In addition, it routinely recycles capital, selling mature assets to fund higher-returning opportunities.
Brookfield Renewable's business model layers in safety features that enable it to withstand challenging market conditions. It focuses on future-proof, renewable-energy assets that generate steady income. It has a strong financial profile, giving it the flexibility to continue making investments. Because of these features, the company should have no problem growing its cash flow and dividend in the coming years, even if the economy hits another rough patch.
Built for tough times
Neha Chamaria (Enterprise Products Partners): Over the past decade or so, two recessions hit the U.S. energy sector. Several companies went bankrupt, and many others slashed or suspended their dividends. Through all of it, Enterprise Products Partners didn't just survive -- it thrived. The company's cash flows kept rising and so did dividends.
Of course, Enterprise Products' midstream energy infrastructure business helps as it ensures steady income and cash flows in the form of fees under long-term contracts for transportation of natural gas, crude oil, petrochemical, and refined products. As is usually the case, whether oil prices are rising or falling, demand for Enterprise Products' energy transportation and delivery services doesn't fluctuate.
Yet, not all midstream companies can generate shareholder returns as strong as Enterprise Products', and there's a reason why: The company is committed to growing dividends while maintaining its financial fortitude. As an example, even after its recent acquisition of Navitas Midstream, Enterprise Products doesn't have any significant debt maturing until 2026.
As for dividends, Enterprise Products has increased dividends for 23 consecutive years now, and its stock currently sports a solid 7% in yield. With the recent volatility in the oil and gas markets catching investors off guard, many see turbulent times ahead. If you think so too but are keen to remain invested in energy, Enterprise Products is the stock to consider.
