With October just around the corner, there’s no one way to play the energy sector, but that’s nothing new. There have always been several tactics for investing in this volatile Wall Street niche. The question is: which tactic suits you?
Here are three of the top energy stocks to consider as you try to answer that question: Devon Energy (NYSE: DVN), Chevron (NYSE: CVX)And Enbridge (NYSE: ENB). Let’s see what makes them potential investments this month.
1. Devon Energy is like jumping in with both feet
Devon Energy is exclusively active in the upstream segment of the energy sector. That means it produces oil and natural gas. This focus has very big implications, the most notable of which is that Devon’s sales and profits are almost entirely dependent on the price of the commodities it sells. Don’t underestimate the effect this can have on the company’s share price, financial performance and dividend. Oil and natural gas are known for their dramatic and often rapid price fluctuations.
Devon reinforces the effect by pursuing a variable dividend policy. So if energy prices are high, the dividend will be high, but if energy prices are low, the dividend will be low. It’s an elegant way to ensure that shareholders benefit directly from high oil prices. But it’s not something an investor looking to live off his dividend checks is likely to appreciate.
In fact, investors shouldn’t really consider the dividend yield (currently around 5%) as a reliable indicator of the income this stock will generate over time. This stock is best suited for investors who believe that oil prices will rise, or at least remain at their current levels.
That said, Devon is a respected energy producer. It has an investment grade balance sheet and exceeded its volume expectations in the second quarter of 2024. It is expanding through acquisitions, has a fairly low breakeven point (about $40 per barrel of oil) and has more than a decade of drilling resources. There’s a lot to love, but be prepared for the ups and downs of energy prices.
2. Chevron is like wading slowly into water
Chevron is also active in the upstream sector, but that is only part of its activities. As an integrated energy company, it is also active in the midstream (pipelines) and downstream (chemicals and refining). This diversification, along with a global footprint, helps smooth out the peaks and troughs in oil and natural gas prices. Energy prices are still the driving force behind Chevron’s top and bottom line results, but the company won’t be subject to the wild performance swings that a pure-play producer would experience.
But what really sets Chevron apart from other choices in the energy sector is its balance sheet. The company’s debt-to-equity ratio is the lowest among its closest peers at around 0.15 times. That gives the company leeway to exert more influence during energy downturns so it can continue to invest in its operations and pay shareholder dividends. It is striking that the dividend has been increased for 37 years in a row. Now add in the fact that the yield today is around 4.3%, and you can see why Chevron would be a good option for dividend investors looking to add a permanent position in the energy sector to their portfolios.
3. Enbridge is like just dipping your toes in
The last stock to consider is Enbridge, a giant North American midstream company. Midstream companies own vital energy infrastructure, for which they charge their customers. There are some important facts to consider. The energy sector cannot function without the pipelines, storage and transportation assets that Enbridge owns. The demand for energy is more important than the price of the raw materials flowing through Enbridge’s system. And energy demand generally remains robust, even when oil prices are low. Overall, Enbridge has a long history of generating reliable cash flows.
These cash flows support the share’s attractive dividend yield of 6.5%. That dividend has been increased annually for 29 years in a row. If you’re looking for a large and reliable revenue stream, Enbridge has the solution for you.
There’s another interesting story here, as one of the company’s main goals is to provide the world with the energy it needs. To that end, it has expanded into the regulated natural gas utilities and clean energy sectors, which together account for approximately 25% of earnings before interest, taxes, depreciation, and amortization (EBITDA). So not only is Enbridge a solid, high-return option in the energy sector, it’s also a hedge of sorts as the world moves toward cleaner energy options.
There are several ways to play the energy sector
As the trio of stocks here demonstrate, the energy sector is not a one-size-fits-all affair. There are several ways you can invest depending on how you want to add energy exposure to your portfolio.
The most aggressive option here is Devon Energy, the pure-play producer. Chevron is a sort of middle-of-the-road option that should hold up well throughout the energy cycle and will likely continue to pay you a reliable dividend even during industry downturns. Enbridge is a reliable cash flow generator with a great dividend yield for investors trying to maximize their income stream. One of these top energy picks should meet your needs if you’re looking for an energy stock in October.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has and recommends positions in Chevron and Enbridge. The Motley Fool has a disclosure policy.
3 Top Energy Stocks to Buy in October was originally published by The Motley Fool