Energy is vital to the modern world, with oil and natural gas expected to play a big role for decades to come. However, the shift toward cleaner energy sources is a long-term headwind that investors have to carefully consider when investing in the energy sector. The U.S. government's softening stance on greenhouse gases is a broad positive, but investors should still stick with industry giants like ExxonMobil (XOM +1.97%) and Chevron (CVX 0.08%). Here's why.
A little bit of everything
Exxon and Chevron are both globally diversified integrated energy companies. That means they have operations across the entire energy value chain, including producing oil and natural gas, transporting those fuels, and processing them into chemicals and refined products, such as gasoline. You probably know Exxon and Chevron from the gas stations you see, but they are much bigger entities than that.
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The diversification in Exxon and Chevron's businesses helps to soften the peaks and valleys inherent in the volatile energy sector. An additional benefit these two energy giants offer is their financial strength, as they have the lowest debt-to-equity ratios in their peer group.
During industry downturns, Exxon and Chevron take on debt to support their businesses and dividends. Notably, each company has increased its dividend annually for over three decades. When energy prices recover, as they always have historically, leverage is reduced.
NYSE: XOM
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Good for now, but for how long?
The U.S. government's easing of greenhouse gas restrictions is good for the entire energy sector, so Exxon and Chevron will benefit. That said, they may not benefit as much as more focused businesses.
For example, a refiner that makes gasoline could see higher demand for a longer period of time if internal combustion engine vehicles aren't forced out of the market by strict regulations on emissions.
NYSE: CVX
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But regulations change, and a future administration could reinstate the regulations that are currently being eased. This is why most investors will be better off owning proven industry leaders with widely diversified businesses. Exxon and Chevron will benefit from a friendly regulatory environment, and they are likely to be best prepared to deal with increased regulations if, or perhaps when, they come along.
Given the inherent volatility of the energy sector, all good news needs to be taken with a grain of salt. It is still highly advisable to invest conservatively with reliable dividend payers like Exxon and Chevron. And as a bonus, you'll be able to collect Exxon's well-above-market 2.8% yield or Chevron's 3.9% yield while you ride out the industry's regulatory swings.
