In general, the energy sector is not for the faint of heart. Oil and natural gas prices are known to be highly volatile, which feeds into sentiment around energy stocks Chevron (NYSE: CVX), Partners for business products (NYSE:EPD)And Devon Energy (NYSE: DVN). But if you’re looking for energy stocks, each of the companies in this trio has something interesting to offer as Wall Street heads into the month of November.
When you look at integrated energy giant Chevron, don’t think about oil. Think diversification and financial strength. That’s what this company was built on. To start with, Chevron has activities in the upstream (oil and gas production), midstream (pipelines) and downstream (chemicals and refining). Each segment of the energy industry operates a little differently and when combined into one portfolio, they help smooth out the inherent peaks and valleys of the commodity-driven sector. This is a big part of why Chevron has managed to increase its dividend annually for 37 consecutive years, despite operating in a volatile industry.
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But that’s not the only reason. Another important factor to consider is Chevron’s balance sheet. At the end of the second quarter, the oil giant’s debt-to-equity ratio stood at just under 0.15 times, the lowest among its closest peer group (and also low on an absolute level). That gives the company leeway to exert more leverage during energy downturns to support its business and its dividend. If you’re an income investor looking for diversified exposure to the oil and gas sector, Chevron’s 4.3% dividend yield is a good choice if you also want to sleep well at night.
That said, you can also choose to obtain your energy exposure in a different way. In concrete terms, by focusing on that one segment of the industry that is not so volatile: the midstream. Companies like Enterprise have their own energy infrastructure, including pipelines, storage, transportation and processing assets. These are essential for moving oil and natural gas around the world and tend to see strong demand in both good and bad energy markets. That changes the equation here because Enterprise simply charges fees for the use of its assets.
That means energy price fluctuations aren’t as big of a problem for Enterprise’s cash flows as they are for an energy producer. So, this master limited partnership (MLP) can easily support its huge 7.3% yield. To put a figure on that: the distributable cash flows currently cover the payment 1.7 times. There is a lot of room for setbacks before a cut is on the table. And it helps explain how Enterprise has grown its distribution for 26 years in a row. If you want energy exposure but prefer boring investments, Enterprise has the right choice.
Okay, so you’ve diversified Chevron and boring Enterprise. What if you think there will be an oil price rebound in November? One of the best ways to take advantage of this is to own a pure-play producer like upstream-focused Devon Energy. Because the top and bottom are directly related to the price of oil and natural gas, stocks tend to rise along with the price of oil and natural gas (and, of course, fall with energy prices as well). This is not a stock for the faint of heart!
But there’s another twist here. Devon has a variable dividend policy linked to its financial performance. That means you can’t really count on the 5.1% dividend yield, as the dividend will change from quarter to quarter. This could scare conservative dividend investors away from the stock. However, that variable dividend also means that shareholders will receive dividend increases when oil prices rise. This can provide some kind of cover for your actual energy costs. Just as your gas and heating costs are rising, you’re likely to receive a larger dividend check from Devon.
Far too many investors view the energy sector as a single entity. But like all sectors, it is made up of individual companies. As November approaches, you might consider companies like Chevron, Enterprise and Devon, with each company attractive for a different reason, as they are all very different companies. If you look at energy stocks today, you’ll likely find at least one worth adding to your portfolio.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
3 Top Energy Stocks to Buy in November was originally published by The Motley Fool
