Oil prices are notoriously volatile, and investors have seen that over the past year. Crude prices spiked to over $120 a barrel at their peak last summer before falling back into the $70s. It's anyone's guess where crude prices go next. While some believe oil could go lower, others think crude will heat back up this summer.
Volatile oil prices will impact the cash flows of producers, which could affect their oil-driven dividend payments. However, some energy companies are relatively immune to the impact of oil price volatility. That's the case with Enbridge (ENB 0.20%), Energy Transfer (ET 0.44%), and Enterprise Products Partners (EPD -0.31%). Here's why that makes them stand out to a few Fool.com contributors as great oil dividend stocks to buy amid the sector's volatility.
Demand is the key
Reuben Gregg Brewer (Enbridge): Canadian energy giant Enbridge's portfolio of energy infrastructure assets reaches across North America. It largely charges fees for the use of its pipelines, which is a key factor that differentiates it from energy industry players where oil and natural gas prices tend to drive top- and bottom-line results.
Essentially, demand is more important to Enbridge than energy prices. And demand, even during industry downturns, generally remains fairly stable over time. It's why the company has managed to increase its dividend annually for more than a quarter of a century. The current dividend yield is a generous 7.1%.
That said, the company's pipelines only make up around 84% of the company's earnings before interest, taxes, depreciation, and amortization (EBITDA). Of the rest, 13% comes from a regulated natural gas utility and 3% from a renewable power business. Clearly, moving oil and natural gas are the company's most important businesses, but Enbridge is using the cash flow these reliable assets generate to build new operations that can support long-term cash flow growth.
So not only does the company have a business that is resilient amid energy price volatility, but it is also increasingly less reliant on moving oil and natural gas. The most exciting part of the story is the company's small clean energy operation. It has a number of sizable projects in the works in Europe that will come online over the next few years. This will increase the business's scale and allows Enbridge to shift, along with the world, toward cleaner alternatives.
The monster payout is very sustainable
Matt DiLallo (Energy Transfer): Energy Transfer offers a massive cash distribution to investors that yields 9.9% after it boosted its payout by 75% over the past year. That big-time payout can easily survive lower oil prices because the midstream company has limited exposure to commodity price volatility.
This year, about 90% of its earnings will come from fee-based contracts and regulated rate structures. Because of that, the master limited partnership (MLP) has high visibility into its earnings and cash flow. Energy Transfer expects its adjusted EBITDA to be between $12.9 billion and $13.3 billion this year.
That will give Energy Transfer enough cash to cover its massive distribution and growth-related capital spending with ample room to spare. The MLP expects to invest $1.6 billion to $1.8 billion on expansion projects this year, down from $1.93 billion in 2022.
Meanwhile, the midstream giant has a solid balance sheet, with leverage recently reaching its target range of 4 to 4.5 times debt to EBITDA. Because of that, it has a lot more flexibility. The company recently used some of its financial capacity to acquire Lotus Midstream in a $1.45 billion deal. The transaction will enhance its crude oil footprint in the resource-rich Permian basin and boost its free cash flow without impacting its balance sheet.
Energy Transfer spent the past couple of years shoring up its balance sheet. Because of that, its reset distribution is on a very sustainable foundation and can easily survive if oil prices keep heading lower. That makes the MLP an attractive option for those seeking a big-time payout.
Built for tough times
Neha Chamaria (Enterprise Products Partners): Volatility is not new for investors in oil and gas stocks, but it always pays to own some stocks that can generate steady income even in turbulent times. That's something you can easily expect from Enterprise Products Partners, a rock-solid dividend stock that grows dividends year after year and yields a hefty 7.7% right now.
Enterprise Products is one of the largest midstream companies, with a pipeline spanning more than 50,000 miles that transports natural gas, natural gas liquids, crude oil, refined products, and petrochemicals. It has increased dividends every year for the past 24 consecutive years, which also means it didn't falter even in the years of financial crises and oil price turmoil. Over the years, that dividend growth has contributed significantly to shareholders' total returns from the stock.
Even if oil prices were to fall further this year and beyond, there's a solid chance that Enterprise Products will still be able to pay steady dividends, thanks to stable cash flows that it generates from the storage and transportation services it provides under long-term contracts. Enterprise Products, in fact, generated record gross profit in 2022 and grew its distributable cash flow by 17% to $7.8 billion, which was almost 1.9 times the dividends it paid out in the year.
In short, Enterprise Products has a lot of cash right now that it can spend on growth -- the company has projects worth $5.8 billion under construction -- as well as use to pay higher dividends to shareholders every year. It's the kind of dividend stock that can survive oil price volatility.
