Oil prices are notoriously volatile. Over the past year, crude oil has peaked at around $90 a barrel and has fallen into the $60s. That volatility can have a major impact on the cash flows that oil companies produce.
However, some oil companies are better positioned to weather the oil sector’s volatility. Chevron (NYSE: CVX), Partners for business products (NYSE:EPD)And Enbridge (NYSE: ENB) stand out to some Fool.com contributors for their ability to mitigate some of the impact of volatility on their cash flows. That’s why they’re great oil dividend stocks to buy for those concerned about sector volatility.
Chevron is ready for the next recession
Ruben Gregg Brouwer (Chevron): West Texas Intermediate (WTI) crude oil prices fell to zero in 2020 thanks to the economic turmoil caused by the coronavirus pandemic. There were some technical issues surrounding that drop, but it was a jarring reminder of how volatile energy markets can be. Chevron increased its dividend in 2020, even as the energy crisis ultimately pushed its earnings into the red. Chevron has increased its annual dividend for 37 years.
If you’re a conservative dividend investor who wants exposure to the energy sector, Chevron with its 4.2% dividend yield should be on your short list. But the dividend growth streak isn’t the end of the story. You have to understand how Chevron achieved that growth despite operating in a highly cyclical industry. The answer lies in preparing for recessions before they happen.
First, Chevron’s business is diversified across the energy sector, from drilling through midstream to chemicals and refining. This helps soften the blow of oil price movements, as each segment performs a little differently than the others throughout the cycle.
But then there’s Chevron’s impressively strong balance sheet. As shown in the chart above, the company adds leverage during weak periods to continue investing in its business and paying dividends. When the market recovers, it reduces leverage in preparation for the next downturn.
Note that the debt-to-equity ratio is currently near its lowest level in the past decade. This means Chevron will be ready to protect investors when oil prices inevitably fall again.
A quarter of a century of consistency to his name
Neha Chamaria (Enterprise Products Partners): The volatility of oil prices can be unnerving, but that shouldn’t stop you from investing in energy stocks. Some energy stocks can even go a long way toward protecting you from volatile commodity prices and giving you solid returns over time. An example: Enterprise Products Partners.
Enterprise Products Partners’ history shows how resilient the oil and gas giant has been even in the most challenging of times, both for the oil markets and the broader economy. For example, the company has consistently increased its dividend for the past 25 consecutive years. That includes years like 2014-2016, when oil prices plummeted, forcing some oil and gas companies to cut their dividends.
As one of the largest midstream energy companies, Enterprise Products Partners primarily generates sustainable cash flows from long-term, fee-based contracts. That means the company continues to serve customers and store and transport essential commodities such as crude oil and natural gas even during an oil price decline, protecting cash flows from volatility. To top it all off, Enterprise Products Partners consistently invests in its energy infrastructure to grow its cash flows, maintain a strong balance sheet and reward shareholders, no matter what.
With nearly $6.9 billion in projects currently under development, Enterprise Products Partners should be able to pay larger dividends to its shareholders in the coming years and generate strong returns regardless of where oil prices are. The oil and gas stocks also yield a solid 7.3%, making it a great oil stock to buy and hold to protect yourself from volatility.
Built for predictability
Matt DiLallo (Enbridge): Enbridge is remarkably resilient to oil price volatility over the years. The Canadian pipeline And utility The company has virtually shielded its business from volatility by deriving 98% of its revenue from stable service fees agreements or fee-based contracts. Therefore, it has a predictable cash flow profile with very low risk:
As this chart shows, Enbridge has met its earnings estimates for eighteen years in a row. This consistency has been achieved despite significant periods of oil price volatility.
Enbridge currently pays out 60% to 70% of its very stable cash flow in dividends to investors. That relatively conservative payout ratio gives the company a large cushion while also allowing it to maintain a significant amount of cash flow to fund expansion projects. The company has that too a very strong one investment grade balance sheet. These features boost Enbridge’s dividend (which currently yields over 7%). an extremely sturdy one foundation.
The company uses the retained cash and a strong balance sheet to invest in expanding its activities. Enbridge currently has billions of dollars of expansion projects under construction, including new natural gas pipelines, oil storage capacity expansions, natural gas facility expansions and renewable energy projects. Enbridge will also make acquisitions as opportunities arise. It is currently being worked on concludes the final phase of a one-time utility acquisition.
Enbridge expects its growth investments to do the same fuel to grow cash flow per share by 3% annually until 2026 and by 5% thereafter. This earnings growth should allow the country to continue raising its dividend – which it has done for 29 years in a row – even if oil price volatility strikes again.
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Matt DiLallo holds positions at Chevron, Enbridge and Enterprise Products Partners. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has and recommends positions in Chevron and Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Oil is volatile; Here are 3 dividend stocks that will protect you from that volatility, originally published by The Motley Fool
