Oil prices are falling, so now is a good time to re-evaluate how best to invest in this sector.
In its short-term energy outlook for August, the U.S. Energy Information Administration (EIA) lowered its full-year target price for Brent crude oil (the international benchmark) to $84 per barrel from $86. The EIA remains optimistic that crude prices will rise in the coming months, but also expects lower oil consumption.
Demand for oil typically rises as global economic output increases. But the relationship between the economic cycle and oil prices can vary across regions, depending on the level of economic development and climate policies.
Despite some headwinds for oil prices, here are the reasons these Fool.com contributors think Enbridge (NYSE: ENB), Equinor (NYSE: EQNR)And Vitesse Energy (NYSE: VTS) are three dividend stocks in the energy sector that you should buy now.
Enbridge: A midstream leader with nearly three decades of dividend increases
Scott Levine (Enbridge): Oil prices may be falling, but that’s no reason to stay away from leading energy companies like Enbridge, a company that transports about 30% of the crude oil produced in North America and nearly 20% of the natural gas used in the U.S.
In fact, the stock is currently attractively valued, presenting income investors with a great opportunity to invest in a leading pipeline stock that has demonstrated a steadfast commitment to rewarding shareholders, has increased its dividend for 29 consecutive years, and offers a forward dividend yield of 6.9%.
While upstream and downstream stocks are sensitive to energy prices, Enbridge is more resilient. The company operates oil and natural gas pipelines and storage facilities, which generate strong, reliable cash flows. Enbridge signs long-term contracts with customers, which helps protect it from energy price volatility. In addition, Enbridge has regulatory cost-of-service arrangements to help mitigate risk.
This business model gives management a solid outlook for future cash flows, which in turn helps it plan for dividend increases and other capital expenditures such as acquisitions. For example, management forecasts that distributable cash flow — $11.3 billion in 2023 — will grow at a compound annual rate of 3% through 2026.
Enbridge shares trade at 9 times operating cash flow, which is a slight discount to five-year operating cash flow of 9.2. It may not be a screaming buy, but that’s not necessarily the case with every stock purchase. Enbridge is an attractive choice for those digging in the oilfields for a reliable, low-risk dividend stock.
Equinor: A Major Energy Company Worth Buying Now
Daniel Foelber (Equinor): Investors have August 28th marked in their calendars as an important date, as this is the day when the market’s darling Nvidia is expected to report its second-quarter results for fiscal 2025. But it’s also the date on which Norwegian energy giant Equinor will pay out a whopping $0.70 per share in dividends to holdings of American Depositary Receipts (ADRs) on the New York Stock Exchange — representing an annual yield of 10.4% based on Equinor’s share price of around $27.
ADRs offer U.S. investors a way to buy shares of foreign companies such as Equinor, Toyota engineetc., on an American stock exchange.
Equinor’s regular quarterly dividend is $0.35 per share, but it also pays a special dividend of $0.35 per share based on company performance. In 2022, it paid $2.90 in total dividends per share, followed by $3.40 in dividends per share in 2023.
When a company has an abnormally high yield like Equinor, it is best to approach the investment opportunity cautiously to ensure the company can pay its dividend costs and to understand why the yield is so high. In the case of Equinor, the company has been crystal clear about its large capital return program to shareholders through both share buybacks and dividends.
Unlike other major oil companies that are ramping up capital expenditures and/or making high-profile acquisitions, Equinor is keeping a tight rein on spending as it works to diversify its business and invest in renewable energy. The company’s oil and gas assets are a cash cow, and Equinor passes profits directly to shareholders, including plans for as much as $14 billion in buybacks and dividends by 2024, which is 18.6% of Equinor’s market value.
Equinor is an excellent choice for investors who agree with the plans to reduce domestic oil and natural gas production and achieve ambitious carbon reduction targets. However, if you are looking for companies that are aggressively boosting oil and gas production, you may prefer ExxonMobil or ConocoPhillips instead of.
Vitesse Energy: An energy company where dividend comes first
Lee Samaha (Vitesse Energy): Vitesse Energy, which is trading at a dividend yield of 8.6% at the time of writing, is an oil and gas exploration and production company that employs an unusual business model. Rather than owning and operating assets, management prefers to buy stakes in wells operated by other leading oil and gas companies such as chord energy, HessAnd EOG sources.
As of August, the company had interests in 7,018 wells with “an average working interest of 2.8% per working interest well.” The strategy spreads risk per well and provides management flexibility because, as an operator, it is not burdened with drilling obligations.
On the other hand, most of the assets are in the Bakken oil field in North Dakota, and the model requires management to continue to grow production by successfully appraising and acquiring assets. It is also an asset-light model, so Vitesse does not have significant, ongoing maintenance capital investment requirements.
In addition, management has a discretionary policy of hedging oil production to protect the dividend. This policy can be good because it dilutes the risk of the shares through exposure to the oil price and increases Vitesse’s exposure to what it does best: growing oil and gas production.
That said, there is still a discretionary element here and investors are relying on management to compensate for any significant weakness in the oil price. Perhaps the best way to think of Vitesse is as a stock that is likely to do well outside of a sharp drop in the oil price. That makes it attractive as part of a diversified portfolio of high-yield stocks.
Should You Invest $1,000 in Enbridge Now?
Before you buy shares in Enbridge, you should consider the following:
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chord Energy, EOG Resources, Enbridge, Nvidia and Vitesse Energy. The Motley Fool recommends Equinor Asa. The Motley Fool has a disclosure policy.
Despite Falling Oil Prices, 3 High Yield Dividend Stocks You Should Buy Now was originally published by The Motley Fool
