Energy prices rallied last quarter, with crude oil soaring about 30%, fueled by OPEC's intervention. While oil prices are higher right now, that won't always be the case. Oil prices are cyclical and tend to move down when demand delines and there's too much supply.
Since there's no telling when that might happen again, investors need to be prepared for the next downturn. Chevron (CVX 1.66%), Enbridge (ENB 0.41%), and Enterprise Products Partners (EPD 1.00%) stand out to a few Fool.com contributors for their ability to weather the inevitable decline. Here's why they think investors should own them before the next downturn.
Chevron has a playbook for energy price declines
NYSE: CVX
Key Data Points
Reuben Gregg Brewer (Chevron): While it's just a fact of life that oil and natural gas prices are volatile, there are different ways for companies to deal with that reality. Integrated energy giant Chevron has focused on making sure its balance sheet is strong. To put a number on that, its debt-to-equity ratio is currently around 0.15. Not only would that be a good number for any company in any industry, but it also happens to be the lowest among Chevron's closest peer group.
CVX Debt to Equity Ratio data by YCharts
The normal course of action during an energy downturn is for Chevron to take on debt. The cash it raises gets used to fund its business and to support the dividend during a period in which its earnings are weak, and perhaps even deep in the red. When oil prices recover, which they have historically, Chevron pays down debt and prepares for the next energy cycle. This approach has worked very well over time, with the company sporting a streak of 36 consecutive annual dividend increases. That's impressive given the highly cyclical nature of the energy sector.
In fact, noting the success of the approach here, long-term investors might want to hold off on buying Chevron today. You'll probably find it more attractive to buy when energy prices are low and other investors are throwing the baby out with the bathwater. Indeed, today Chevron's yield is roughly 3.6%. During the last big oil price downturn the dividend yield rose to more than 8%.
Insulated against price declines
NYSE: ENB
Key Data Points
Matt DiLallo (Enbridge): Enbridge has one of the lowest-risk business models in the energy sector. The pipeline-utility company generates very stable cash flows. About 98% of its earnings come from regulated cost-of-service rate structures or long-term fixed-rate contracts with limited volume and no commodity price risk. It therefore produces predictable results throughout the market cycle:
Image source: Enbridge.
Enbridge is further enhancing the stability of its earnings by acquiring three natural gas utilities from Dominion Energy for $14 billion. The transactions will increase its income from regulated utilities from 12% to 22% of its total while further shifting its earnings mix away from liquids to lower carbon energy, which will now contribute half the total. The deals will also enhance its growth profile by providing Enbridge with visible earnings growth from a plan to invest $5 billion Canadian ($3.7 billion) on capital projects over the next three years.
That deal adds to Enbridge's already solid growth prospects. The energy infrastructure giant expects to grow its earnings by about 5% per year, driven by rising rates, its massive CA$24 billion ($17.5 billion) expansion project backlog, and future investment opportunities, both organic and through acquisition.
Those drivers should give Enbridge the fuel to continue increasing its high-yielding dividend, which currently sits at 8.3%. It has given its investors a raise for 28 straight years, showcasing the resiliency of its business model.
Enbridge's visible and resilient growth, along with its attractive dividend, make it an excellent energy stock to own ahead of the inevitable downturns.
A reliable, high-yield oil stock
NYSE: EPD
Key Data Points
Neha Chamaria (Enterprise Products Partners): Enterprise Products Partners is one of the few stocks that can navigate turbulence in the oil and gas markets and keep rewarding shareholders. This chart shows how steadfast the energy infrastructure giant's cash flows have remained over the years, including in the historically challenging years.
Image source: Enterprise Products Partners.
Moreover, Enterprise Products remained undeterred by the challenges and even raised its dividends during those difficult times. This year, it increased its dividend for the 25th consecutive year.
While it's true that Enterprise Products primarily earns fees under long-term contracts, using its steady cash flows judiciously is an equally big reason behind the company's resilience. Enterprise Products prioritizes a strong balance sheet -- it has among the highest credit ratings in the U.S. midstream energy industry. Strong financials allow the company to exploit growth opportunities as and when they come along, and to keep rewarding shareholders with bigger dividends and regular buybacks in between.
Right now, Enterprise Products is on solid footing. Its distributable cash flows covered dividends comfortably by 1.6 times in the second quarter. The company expects to invest $2.4 billion to $2.8 billion on organic growth projects this year, which is higher than the amount it spent on growth in each of the past two years. Enterprise Products also strives to fund its capital expenditures and dividend growth internally, which again speaks volumes about the company's financial fortitude. So even when energy prices fall, Enterprise Products stock -- with a solid yield of 7.3% -- is the least likely to disappoint.
