The simple fact is that oil and natural gas prices go up and down, often in dramatic fashion. So when energy companies turn in great profits, like they are at the moment, investors should start to get worried that the next stage of the cycle is approaching. This potential turn is also why industry giant Chevron (CVX 1.04%) and midstream stalwart Enterprise Products Partners (EPD -0.41%) are two stocks you might want to own if you are looking to add some energy exposure to your portfolio.
1. Chevron: It's seen this before
Chevron is what's known as an integrated energy company, as it has exposure to everything from drilling (upstream) to pipelines (midstream) to refining and chemicals (downstream). It also has a global footprint, adding even more diversification to the business mix. And with a market cap of around $340 billion, it is an industry giant. It is a good way to get broad exposure to the oil and natural gas industry.
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What's really attractive here, however, is that Chevron has proven it can weather the inherent ups and downs in this highly cyclical space. The most notable way to see this is the over 30 years of consecutive annual dividend increases. Even when oil prices plunged during 2020, when the economic shutdowns used to slow the spread of the coronavirus led to a swift drop in demand, Chevron supported its dividend. Which gets to the important story here, the oil giant's balance sheet.
Chevron has a debt-to-equity ratio of just about 0.15 times, which would be incredibly modest for any company. That gives it the financial leeway to use debt during industry downturns to support its dividend and continued investment in its business. To put a number on this, the debt-to-equity ratio was twice as high in 2021, reflecting the use of debt to muddle through the 2020 energy downturn.
Now that the company is doing better, management is preparing for the next industry downturn by repaying debt. With a dividend yield of 3.2%, Chevron is still offering a well-above-market income opportunity. And you can sleep well at night knowing that the company is built to survive hard times when they come again.
2. Enterprise Products Partners: Avoid the cycle
For investors that can't stand the ups and downs of a cyclical industry like energy, there are still some pretty attractive options in the sector. You just have to know where to look. North American midstream giant Enterprise Products Partners should be your first stop. The company does not drill for oil or natural gas; it merely helps move these vital energy sources and the products into which they get turned, around the world. It charges fees for the use of the physical infrastructure it owns. Demand for energy is more important than energy prices.
This makes Enterprise's business fairly predictable and creates a reliable stream of cash flow to support the master limited partnership's (MLP's) hefty 7.6% distribution yield. But here's the key -- the distribution was increased annually for over two decades, a testament to the consistency of the business. To be fair, given the high yield, investors should recognize that most of the return here will come from the distribution. However, for dividend investors looking to maximize their current income, that probably won't be a problem.
So the real question here is how safe is that distribution? Well, Enterprise has an investment-grade-rated balance sheet. And its distributable cash flow covered the distribution by huge 1.8 times in the third quarter of 2022. In other words, the distribution looks rock solid. Moreover, management has $5.5 billion worth of capital investment projects in the works that should help to keep the payment growing. That spending won't lead to massive dividend growth, as this is really a slow and steady tortoise, but given the generous yield today, that's completely reasonable.
Ready for anything
When you buy a company's stock you need to understand what it will do in both good markets and bad. That's particularly true for energy companies, given the highly cyclical nature of the industry. Chevron is ready for the downturns and benefits from the upturns, making it a good way to gain long-term exposure to the sector. Enterprise takes a different approach, operating in the most stable part of the energy sector so it can generate huge distributions for investors in good markets and bad. The units won't be as exciting as the stock of a driller, but that's the point.
Both are solid dividend options today, as investors should probably be erring on the side of caution amid huge industry profits.
