If you are looking for an energy stock in June, you have plenty of options. But the big question you need to ask yourself is, “How much exposure to commodities do I want?” That will change the stock you pick in a very material way.
Here are three options across a broad spectrum, from virtually no exposure in Enterprise Products Partners (NYSE: EPD) to Chevron‘s (NYSE: CVX) diversified energy portfolio to Occidental Petroleum‘s (NYSE: OXY) more aggressive investment in oil and gas.
Enterprise is a high yield energy punt
The biggest risk when it comes to buying an energy stock is going to be the highly variable prices of oil and natural gas. You don’t have to avoid the sector if you don’t want to take on this risk — you just have to focus on the midstream space.
This is where Enterprise Products Partners plays, helping to move oil, natural gas, and related products into which they get turned around the world. It owns pipeline, storage, and transportation infrastructure.
What’s most important, however, is that Enterprise charges fees for the use of its assets. The price of the commodities it transports is less important than demand for energy, which tends to remain robust even when oil prices are falling. So Enterprise tends to have very reliable cash flows to cover its generous 7.2% or so distribution yield.
The distribution has been increased annually for a quarter of a century, and it is covered 1.7 times over by distributable cash flow. If you are looking for a rock-solid income investment in the energy space, Enterprise should be on your wish list in June.
Chevron is built to ride the cycle
If you want to take on some commodity risk, but not too much, then the next best option in June is probably Chevron.
Chevron is an integrated energy giant, with a global portfolio of assets that spans from the upstream (drilling) through the midstream (pipelines) all the way to the downstream (chemicals and refining). This diversification helps to soften the peaks and valleys of the energy cycle, since each segment tends to perform differently through the cycle. For example, downstream operations often benefit from the low energy prices that hamper upstream operations.
But the bigger story here is probably Chevron’s balance sheet, which is the strongest among its closest peer group. That means it has more leeway to take on the debt it needs to fund both its operations and its dividend when energy prices are low.
Notably, the dividend has been increased annually for a huge 37 years and counting. Right now is an interesting time to consider Chevron because its shares are being weighed down by Wall Street’s concerns about its merger with Hess, which may get scuttled. That has left Chevron with a 4% yield, notably higher than similarly situated competitor ExxonMobil, which has a 3.2% yield.
Occidental Petroleum has been aggressive
The last option investors looking at the energy sector might want to consider is Occidental Petroleum, one of the stocks that Warren Buffett owns. Occidental’s story is a bit different, however, because the company is far more aggressive than both Chevron and Enterprise.
The growth efforts Oxy has undertaken have been a bit of a mixed bag. A big acquisition that it stole out from under Chevron left Oxy with a huge debt load just as oil prices started to tank early in the decade. A dividend cut and poor stock performance were the outcome.
However, Occidental has taken its lumps in stride. It has reduced leverage, started increasing the dividend again, and even undertaken additional acquisitions. The dividend yield today is just 1.4%, but that’s not really why you are buying the stock. Simply put, Occidental is an energy stock that’s focused on growing its business.
To be fair, production was lower year over year in the first quarter, even though it was in-line with guidance. But one quarter doesn’t make a trend — the goal here is to become a major player that can run with giants like Chevron and Exxon.
Still, that brings with it risks and, given the outsized impact of its upstream operation relative to its midstream and downstream divisions, more exposure to volatile commodity prices. If the extra exposure to energy prices sounds good to you, then you might like Oxy.
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 have to avoid the sector.
Enterprise lets you benefit from energy demand without the commodity risk and rewards you with a high yield. Chevron provides a more balanced exposure to the energy sector and has a relatively high yield today compared to its closest peer. And Oxy has been working to grow its business so it can increasingly compete with larger players like Chevron. It has 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 has 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
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