If you’re looking for an energy stock in June, you’re spoiled for choice. But the big question you need to ask yourself is, “How much commodity exposure do I want?” That will change the stocks you choose in a very material way.
Here are three options across a broad spectrum, from virtually no exposure Partners for business products (NYSE:EPD) Unpleasant Chevron‘S (NYSE: CVX) diversified energy portfolio Western petroleum‘S (NYSE:OXY) more aggressive investments in oil and gas.
Enterprise is an energy point with high efficiency
The biggest risk when it comes to buying energy stocks is the highly variable prices of oil and natural gas. You don’t have to avoid the sector if you don’t want to take this risk; you just need to focus on the midstream space.
This is where Enterprise Products Partners comes in, helping move oil, natural gas and related products they are converted into around the world. It owns pipeline, storage and transportation infrastructure.
Most importantly, Enterprise charges fees for the use of its assets. The price of the commodities it transports is less important than energy demand, which tends to remain robust even as oil prices fall. So Enterprise tends to have very reliable cash flows to cover its generous distribution yield of around 7.2%.
The benefit has been increased annually for a quarter of a century and is covered 1.7 times by the distributable cash flow. If you’re looking for a solid income investment in the energy sector, Enterprise should be on your wish list this June.
Chevron was built for riding a bike
If you want to take some commodity risk, but not too much, then Chevron is probably the next best option in June.
Chevron is an integrated energy giant, with a global portfolio of assets stretching from upstream (drilling) through midstream (pipelines) to downstream (chemicals and refining). This diversification helps smooth out the peaks and valleys of the energy cycle, as each segment tends to perform differently throughout the cycle. For example, downstream activities often benefit from low energy prices that hinder upstream activities.
But the bigger story here is probably Chevron’s balance sheet, which is the strongest among its closest peer group. That means the country has more leeway to take on the debt it needs to finance both its operations and its dividends when energy prices are low.
It is striking that the dividend has been increased annually for 37 years. Right now is an interesting time to consider Chevron, as its shares are under pressure from Wall Street concerns about its merger with Hess, which may be sunk. This has given Chevron a return of 4%, significantly higher than its comparable competitor ExxonMobilwith a return of 3.2%.
Occidental Petroleum has been aggressive
The final option that investors looking at the energy sector might consider is Occidental Petroleum, one of the stocks that Warren Buffett owns. However, Occidental’s story is a little different, as the company is much more aggressive than both Chevron and Enterprise.
The growth efforts Oxy has undertaken have been a bit of a mixed bag. A major acquisition it stole from Chevron left Oxy with a huge debt burden just as oil prices began to fall early this decade. A dividend cut and poor stock performance were the result.
However, Occidental has tested its lumps. The company has reduced debt, started increasing dividends and even made additional acquisitions. The dividend yield is just 1.4% today, but that’s not really why you buy the stock. Simply put, Occidental is an energy stock focused on growing its business.
To be fair, production in the first quarter was lower year over year, even though it was in line with expectations. But one quarter doesn’t make a trend; the goal here is to become a major player that can compete with giants like Chevron and Exxon.
However, this entails risks and, given the outsized impact of the upstream activities compared to the midstream and downstream divisions, greater exposure to volatile commodity prices. If the added exposure to energy prices sounds good to you, then you might find Oxy interesting.
You have options in the energy patch
The energy sector is not for the faint of heart, given the huge impact that volatile energy prices can have on the financial performance of energy stocks. But that doesn’t mean you should avoid the sector.
Enterprise lets you benefit from energy demand without the commodity risk and rewards you with a high return. Chevron offers more balanced exposure to the energy sector and currently has relatively high returns compared to its closest peer. And Oxy has been working to grow its business so it can increasingly compete with bigger players like Chevron. It brings more execution risk and energy exposure, for those with a more aggressive bent.
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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 and Occidental Petroleum. The Motley Fool has a disclosure policy.
3 Energy Stocks to Buy Hand Over Fist in June was originally published by The Motley Fool
