If there is one trait that investors have to really think about when it comes to the energy sector, it has to be volatility. That's because oil and natural gas prices, the foundational products in the energy patch, are commodities prone to swift and dramatic price swings. Most investors looking at the energy sector will want to stick with integrated energy giants like Chevron (CVX +0.27%) and TotalEnergies (TTE +0.00%). Here's why these two stocks, with prices comfortably below $200 a share, are worth adding to your portfolio.
Similar in one important way
There are a lot of differences between Chevron and TotalEnergies. But there is one very important similarity -- they are both integrated energy majors. This means that their businesses span from the upstream (drilling for oil and natural gas) through the midstream (transportation of oil and gas in things like pipelines) and all the way to the downstream (processing oil and gas into chemicals and refined products, like gasoline). Each of these segments of the energy sector have different operating dynamics.
Image source: Getty Images.
Performance in the upstream tends to go the way of energy prices. The midstream is fairly stable, driven by fees for the use of the assets that companies own. And the downstream can be volatile but often benefits from low energy prices, as these commodities are key inputs. All in all, the diversification across these segments helps to smooth out the peaks and valleys in the energy sector. Add in geographic diversification and the story gets even better, since these companies can shift their business investment around to where it will produce the highest returns.
If you are looking for a reliable energy investment, the first place to look is the integrated energy majors. Of that group, Chevron and TotalEnergies stand out but for different reasons.
Chevron is a rock-solid company
Chevron's most notable differentiation from its closest peers is its financial strength. The company's debt-to-equity ratio is 0.12 times, which is lowest in the group. That means its balance sheet is rock solid. This is notable because the normal playbook during industry downturns is to take on debt to support the business while energy prices are weak. Chevron has also used this tactic to support its dividend, which has been increased for 36 consecutive years.
NYSE: CVX
Key Data Points
In other words, when times get tough, Chevron has proven it can withstand the blow. And when energy prices improve again, it reduces leverage in preparation for the next storm. The dividend yield is around 4.3% today, which is notably more than you would get from an S&P 500 Index fund. If you are trying to find an energy investment you can count on through thick and thin, Chevron is a great option.
TotalEnergies is shifting with the world
French energy giant TotalEnergies doesn't have as strong a balance sheet, with a debt-to-equity ratio of 0.43 times. That said, European energy companies tend to hold more cash than U.S. energy companies, helping to reduce the risk of higher leverage. Still, European peers BP and Shell both cut their dividends during the COVID-19 pandemic. TotalEnergies stood out from these competitors by standing by its dividend through this difficult period.
NYSE: TTE
Key Data Points
What's interesting about BP and Shell's dividend cuts was that they came at about the same time these two integrated energy giants announced plans to increase their investment in clean energy. TotalEnergies made the same commitment, just without the dividend cut. But the real truth is that TotalEnergies has been investing in clean energy for years, so the change was just an acceleration of the investment in an area it already knows well. This is the point that may make some investors prefer TotalEnergies, since Chevron is, for the most part, still focusing its efforts around oil and natural gas.
Essentially, if you want an energy stock that is adjusting to the changing energy landscape, TotalEnergies appears to be among the best of the bunch. The dividend yield is an attractive 4.8%, though U.S. investors should note that they will have to pay French taxes on the dividends they collect.
Focus on oil or adjust with the world, your choice
There are many different options in the energy patch. However, if you are looking for reliable companies with generous dividends, Chevron and TotalEnergies are two strong choices. One, Chevron, is perfect for the investor trying to focus on oil and natural gas. The other, TotalEnergies, is a bit more nuanced, as it is mixing renewable power into the story as the world slowly shifts toward lower carbon energy sources. Either way you go, however, both of these sub-$200 stocks are great options in the energy space.
