Oil and natural gas prices have recovered strongly from their most recent nadir in 2020. Now is the perfect time to consider the risk that a new drawdown could be in the cards in this highly cyclical sector. With that in mind, global energy giant Chevron (CVX 0.44%) and North American midstream giant Enterprise Products Partners (EPD 0.48%) are two "safety first" names that you'll want to look at today. Here's a side-by-side comparison to get your research started.
Similar but different
The energy sector is generally broken down into three broad segments -- upstream (drilling for oil and natural gas), midstream (pipelines and other assets that move these products), and downstream (refining and chemicals). There are different dynamics to each segment. Chevron is an integrated energy major because of its size and the fact that its operations span across all three of the industry's segments. This diversification is beneficial because some areas (notably the downstream) perform well when oil prices are falling, helping to soften the blow of energy downturns. Oil and natural gas are still the driving force at Chevron, but it tends to hold up better through the typical energy cycle than a company with only an upstream focus.
Image source: Getty Images.
Enterprise Products Partners, meanwhile, is focused only on the midstream. It owns a massive collection of pipelines, storage, processing, and transportation assets in North America. Although substantially smaller than Chevron, Enterprise's roughly $55 billion market cap makes it one of the largest players in the markets where it operates. What's most notable here, however, is that most of the master limited partnership's (MLP's) revenues are tied to fees for the use of its assets. This creates very predictable cash flow that is largely protected from the volatility inherent in the energy sector.
So, investors looking to benefit from energy price movements will prefer Chevron. Investors that prefer to avoid those inherent ups and downs will probably be better off with Enterprise.
Ample protection
For Enterprise, income investors can go in comfortable that cash flows will be fairly consistent over time. So, the big question is how much of the MLP's distributable cash flow is going out the door as distributions? Enterprise has been very conservative here, with distributable cash flow covering the distribution by a very strong 1.9 times in the second quarter. That provides a huge amount of leeway for adversity before the distribution would be at risk.
Chevron is a bit more problematic since the inherent ups and downs of the energy sector lead to massive swings in profitability. The safety Chevron offers on the dividend front comes from a commitment to paying the dividend (more on this below) and the strength of the company's balance sheet. Its current debt-to-equity ratio is an incredibly strong 0.17 times. This means there's ample room to add debt during weak patches so that Chevron can keep paying the dividend and investing in its business. This is exactly what it did when energy prices plunged in 2020, noting that the debt-to-equity ratio was nearly 0.35 times in early 2021.
CVX Debt to Equity Ratio data by YCharts
There's no winner here, per se. Investors just have to recognize that there are different issues to consider when it comes to the safety of the income stream Chevron and Enterprise throw off.
A history of rewarding investors
It would be easy to call Enterprise's business model the safer of the two, given its reliable and fee-based cash flows, but only Chevron has managed a pretty incredible feat. It is a Dividend Aristocrat, with over three decades of annual dividend increases behind it. That's impressive when you consider that it operates in a highly cyclical industry prone to swift and dramatic price swings. Clearly, the board of directors places a very high value on rewarding investors with a growing income stream. There's no particular reason to expect that to change, noting that a global pandemic would have been a good time to shift gears. Chevron, to its credit, chose to keep the streak alive.
Enterprise, meanwhile, doesn't have quite as strong a distribution history, but it hasn't been around nearly as long as Chevron. So the over two decades of annual hikes is notable and should appease investors worried about the board's commitment to rewarding unitholders. Dividend Aristocrat Chevron wins here, but Enterprise doesn't exactly lose.
Yield or more yield
The next stop is the yield investors can expect. That's a complicated issue in some ways based on the different business models in play. Chevron's dividend yield right now is a generous 3.6%. Enterprise's distribution yield is roughly twice as high at 7.3%. Many dividend investors will probably flip over to the Enterprise camp on that one. This makes sense if you are looking to maximize the income you generate.
That said, Chevron is a way to get commodity exposure that just doesn't exist in the same fashion with Enterprise. So if you are specifically looking to add exposure to oil and natural gas, Chevron is the better call despite the lower yield. And, even if you balk at the more modest yield, given Chevron's strong history and business you might want to keep it on the wish list. The next energy downturn is likely to push the yield materially higher. In the end, Enterprise clearly has a higher yield, but the winner here depends a lot on what you are looking to accomplish.
Two strong options
If you haven't figured it out by now, both Chevron and Enterprise Products Partners are both pretty solid investment choices for income investors. The real question when considering them is about your goals. If you want a reliable and substantial income stream right now, then Enterprise should be your pick. If you are trying to add commodity diversification to your portfolio without taking on massive commodity risk, then Chevron will probably be the better energy call. For those seeking both an extremely high yield and commodity exposure, putting Chevron on the wish list for the next industry downdraft seems like the move that will work best.
