Energy is one of the oldest sectors in the business world, but it's also cyclical, experiencing periods of boom and bust. Unfortunately, the past decade has been challenging for the sector. Over that span, the energy sector of the S&P 500 is up less than 1%, while the index is up over 150%.
Many energy companies have lagged behind the market in 2023, but that's put them in a prime position for new investors. Devon Energy (DVN 0.19%), Enbridge (ENB -1.21%), and Chevron (CVX 0.37%) are companies operating in different parts of the oil and gas value chain and fit that description. Each company is poised for significant long-term growth.
1. Devon Energy
Devon Energy operates in the upstream segment of the oil and gas industry, focusing on hydrocarbon exploration and extraction. Hydrocarbons are important for many energy and industrial needs, so Devon Energy's business is crucial in meeting global energy demand.
Oil production continues to be on the rise for Devon Energy, but more importantly, it's becoming more efficient. Its drilling efficiencies (feet drilled per day) have improved 6% from 2020 to through the first three quarters of 2023, and its completion efficiencies (feet completed per day) have improved 23%. Devon Energy also expects its service cost to decrease by 5% in 2024, helping its margins.
Devon Energy has a nontraditional dividend structure because it's not a set quarterly amount; it has a base quarterly amount (currently $0.20 per share) plus a variable amount based on its cash flow. The bad news is that Devon Energy's cash flow is cyclical with oil prices. The good news is that the base dividend today carries a yield of about 1.78%, which is currently above the S&P 500's dividend yield of 1.62%.
2. Enbridge
Canada-based Enbridge operates in the midstream portion of the oil industry with its oil and gas transportation pipelines. After completing its $14 billion acquisition of three U.S.-based utilities from Dominion Energy, Enbridge will become North America's largest natural gas utility franchise.
The new deal puts Enbridge in a position to increase its capacity and tap into new markets. Enbridge's extensive pipeline network is vital for transportation energy throughout Canada and the U.S., giving it a competitive advantage that won't be easily surpassed or duplicated.
Enbridge's current quarterly dividend is around $0.643 per share. It pays its dividend in Canadian dollars, so the payout American investors see can flucutate with foreign currency changes. As of this writing, the stock has a trailing-12-month (TTM) yield of just over 7.6%. It's a lucrative dividend that should only get more lucrative, since Enbridge has increased it for 28 consecutive years.
ENB Dividend data by YCharts
3. Chevron
Chevron is the only company on the list that operates in upstream, midstream, and downstream (refining, chemical manufacturing, and marketing) operations. It's the 30th most valuable public company in the world, with a market cap of over $270 billion, so it isn't lacking in resources. Its financial strength has been key to its ability to innovate and diversify its energy portfolio.
With its broad operations, Chevron is positioned to benefit from all aspects of shifting energy demand. It's undeniable that the world is transitioning to cleaner energy solutions, and Chevron has done a good job of investing in future energy technologies.
This includes huge strides in carbon capture (it's lowering its carbon capital allocation by $10 billion between now and 2028) and lots of investments in hydrogen (it recently acquired a majority stake in the advanced clean energy storage hydrogen project). Who knows how long it'll take for these emerging technologies to become mainstream, but it's never too early for Chevron to get ahead of the ball.
Chevron also has an appealing dividend at $1.51 quarterly and a TTM dividend yield of just under 4.20%.
Expect to get richer -- just not overnight
None of these companies are growth stocks where you anticipate exponential short-term gains. Still, looking toward 2024 and beyond, all three stand out as compelling investment opportunities in the energy sector. They have strong balance sheets, efficient operations, and strategic direction. All three of those are ingredients in the recipe for longevity.
For investors looking for growth and consistent income, these are good options.
