The oil and natural gas industry has recently been a bastion of safety in an otherwise turbulent stock market. Oil and natural gas prices have been relatively strong as energy buyers shift their focus toward reliability, security, and safety.

The impact of the energy transition toward green and renewable sources, and how fossil fuel companies respond to it, will remain a major theme across the sector. However, present-day energy market dynamics are a reminder that the world still runs on oil and natural gas. Since energy demand tends to increase every year, the retirement of fossil fuel assets may happen at a slower pace than many folks expect.

Here's why integrated energy major Chevron (CVX 0.25%) remains the best way to play the boom in oil and natural gas prices.

An oil rig in the desert.

Image source: Getty Images.

Doing it all

One of the biggest advantages of investing in a major like Chevron is that it plays in every aspect of the oil and natural gas industry. When you think of oil and gas, it's likely the exploration and production (upstream) side of the business that comes to mind. And while extracting those commodities is certainly the primary focus of Chevron, it also has sizable refining (downstream) business, which gives it another revenue stream. 

The downstream side of the industry may be one that investors are overlooking right now. Increased cost pressures are still affecting nearly every industry, and a big part of that is related to high oil prices, either directly through transportation and shipping costs or indirectly through higher petroleum-based product costs.

Refiners have been able to largely combat these inflationary pressures because they operate at the top of the supply chain. In fact, many independent refiners are seeing all-time high stock prices.

In the first half of 2022, Chevron booked $10.1 billion in upstream earnings and $3.31 billion in downstream earnings. To put these figures into context, let's look at the top pure-play downstream companies.

In the first half of 2022, Valero (VLO 1.09%) made $5 billion in net income, Marathon Petroleum (MPC 0.75%) earned $4.9 billion, and Phillips 66 (PSX -0.09%) made $3.7 billion.

Chevron is not only a major oil and gas producer, but its downstream business is also in the same league as the top independent refiners.  

A reliable dividend

Chevron can be an overlooked dividend stock because it doesn't have the traditional safe profile of companies like Coca-Cola or Procter & Gamble, which sell consumer staples as opposed to volatile energy commodities. But if we factor in Chevron's capital discipline, its integrated business model, and its rock-solid balance sheet, it's clear that Chevron is a far safer stock than it may appear at first glance.

Chevron has practically no debt on its balance sheet relative to the size of the business. Less than $12 billion in net debt, a debt-to-capital ratio of just 12%, and a debt-to-equity ratio of 0.07 are bright green flags that indicate that Chevron's capital structure is not dependent on debt.

CVX Net Total Long Term Debt (Quarterly) Chart

CVX Net Total Long Term Debt (Quarterly) data by YCharts.

Its capital structure is so secure that Chevron management has pointed out that there's no real value in the company paying down more debt since its leverage is already way lower than long-term targets -- so it would be better to reinvest capital in the business or return it to shareholders. 

Breathing room

A secure balance sheet is one of the many prerequisites for labeling a dividend stock safe. Another is the ability to consistently generate strong free cash flow (FCF).

Chevron can't control oil or natural gas prices. But it can position its portfolio to achieve low costs of production so that it can generate positive FCF and support dividend hikes even when oil and gas prices are under pressure.

On Chevron's Q2 earnings call, CFO Pierre Breber assured investors that the company can support its operations and its commitment to shareholders even at $50 a barrel oil.

Our business is built for $50. So, part of the confidence in our ability -- currently, if you look at our breakeven and adjust for working capital this quarter, if you look at the last four quarters, it's actually probably a little bit lower than that with the strong refining margins that we've been seeing. So, we're built for lower prices. Free cash flow is going to grow from this base. That should give investors confidence in our ability to continue to grow the dividend at leading rates and to maintain buybacks at very high rates.

Chevron has paid and raised its dividends for 36 consecutive years -- a time frame that included many ebbs and flows in the global energy market. It has been able to sustain this impressive streak mainly due to effective capital allocation and capital discipline.

A high-quality business with a high-yield

Chevron's impeccable balance sheet, paired with its low cost of production and diverse business model, makes it a far more reliable dividend stock than it's given credit for. As long as oil is above $50, Chevron can fund its operations, buybacks, and dividends without trouble. At any oil price above that, this business has a lot of room for serious growth.

Given that crude oil is currently above $90 per barrel at the time of this writing, Chevron is set up nicely to return a lot of capital to shareholders. But it also has a massive margin of error in case oil prices fall. Add it all up, and this 3.7%-yielding dividend stock is a great way to play the oil and natural gas market without getting too reckless.