Oil prices are notoriously volatile. Over the past year, the price of crude oil has reached around $90 per barrel and fallen into the low $60s. This volatility can have a significant impact on the cash flows produced by oil companies.
However, some oil companies are better positioned to weather the volatility of the oil sector. Chevron (NYSE: CVX), Enterprise Product Partners (NYSE:EPD)And Enbridge (NYSE:ENB) stand out from some Fool.com contributors in their ability to mitigate some of the impact of volatility on their cash flows. Thanks to that, they are awesome oil dividend stocks to buy for those worried about the volatility of the sector.
Chevron is ready for the next downturn
Ruben Gregg Brewer (Chevron): West Texas Intermediate (WTI) crude prices fell to zero in 2020 thanks to the economic upheaval caused by the coronavirus pandemic. This drop posed some technical problems, but it was a shocking reminder of how volatile energy markets can be. Chevron increased its dividend in 2020, although the energy downturn ultimately pushed its results into the red. In fact, Chevron has increased its annual dividend for 37 years and counting.
If you’re a conservative dividend investor looking to gain exposure to the energy sector, Chevron and its 4.2% dividend yield should be on your shortlist. But the upward dividend trend is not the end of the story. You need to understand how Chevron achieved this growth despite operating in a highly cyclical industry. The answer is to prepare for downturns before they happen.
First, Chevron’s operations are diversified across the energy sector, from drilling to chemicals and refining to the midstream sector. This helps soften the impact of oil price fluctuations since each segment behaves a little differently from the others throughout the cycle.
But there’s also Chevron’s incredibly strong balance sheet. As the chart above shows, the company adds leverage during periods of weakness to continue investing in its business and paying dividends. When the market recovers, it reduces its debt to prepare for the next downturn.
Note that the debt ratio is currently near the lowest levels of the last decade. This means Chevron is prepared to protect investors when oil prices inevitably fall.
A quarter of a century of consistency under its belt
Néha Chamaria (Enterprise Product Partners): The volatility of oil prices can be disconcerting, but that shouldn’t stop you from investing in energy stocks. In fact, some energy stocks can largely protect you against commodity price volatility and earn you strong returns over time. Case in point: enterprise product partners.
The story of Enterprise Products Partners reveals how resilient the oil and gas giant has been even during the most challenging times, whether for the oil markets or the broader economy. For example, the company has consistently increased its dividend for the past 25 consecutive years. This includes years like 2014-2016, when oil prices fell, 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 flow through long-term, fee-based contracts. This means it continues to serve its customers, storing and transporting essential raw materials like crude oil and natural gas, even during periods of falling oil prices, thereby protecting its cash flows from volatility. To top it all off, Enterprise Products Partners is constantly investing in its energy infrastructure to grow cash flow to maintain a strong balance sheet and reward shareholders no matter what.
With nearly $6.9 billion in projects 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 oil price situation. The oil and gas stock also yields a hefty 7.3%, making it a wonderful oil stock to buy and hold to protect against volatility.
Built for predictability
Matt DiLallo (Enbridge): Enbridge has demonstrated remarkable resilience in the face of oil price volatility over the years. The Canadian pipeline And utility the company has almost shielded its business from volatility by deriving 98% of its profits from a stable cost of service Agreements or fee-based contracts. As a result, it has a predictable and very low risk cash flow profile:
As this chart shows, Enbridge has met its profit forecasts for 18 consecutive years. This consistency has occurred despite significant periods of oil price volatility.
Enbridge currently pays out 60-70% of its very stable cash flow as dividends to investors. This relatively conservative payout ratio gives it a significant cushion while allowing it to retain a significant amount of cash flow to fund expansion projects. The company also has a very strong investment grade balance sheet. These characteristics place Enbridge’s dividend (currently yielding over 7%) an extremely firm foundation.
The company uses its reserves liquidity and a strong balance sheet to invest in expanding its operations. Enbridge currently has multibillion-dollar expansion projects under construction, including new natural gas pipelines, oil storage capacity additions, natural gas utility expansions and renewable energy projects. Enbridge will also make acquisitions when opportunities arise. He is currently working at close the final phase of a once-in-a-generation utility acquisition.
Enbridge expects its growth investments fuel increase cash flow per share at an annual rate of 3% through 2026 and at a rate of 5% thereafter. This earnings growth should allow it to continue raising its dividend – which it has done for 29 consecutive years – even if oil price volatility takes hold again.
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Matt DiLallo holds positions at Chevron, Enbridge and Enterprise Products Partners. Néha Chamaria has no position in any of the stocks mentioned. Ruben Gregg Brewer holds positions at Enbridge. The Motley Fool holds positions and recommends 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 protect you from this volatility was originally published by The Motley Fool
