Broadly speaking, the energy sector is not for the faint of heart. Oil and natural gas prices are known for being highly volatile, which flows through to the sentiment around energy stocks like Chevron (NYSE: CVX), Enterprise Products Partners (NYSE: EPD), and Devon Energy (NYSE: DVN). But if you are looking for energy stocks, each one of the companies in this trio has something interesting to offer as Wall Street enters the month of November.
1.Chevron has a solid foundation
When you look at integrated energy giant Chevron, don't think oil. Think diversification and financial strength. That's what this company is built on. Starting with the business, Chevron has operations in the upstream (oil and gas production), the midstream (pipelines), and the downstream (chemicals and refining). Each of the segments of the energy industry operates a little differently and, when put together in one portfolio, they help to smooth out the inherent peaks and valleys of the commodity-driven sector. This is a key part of the reason that Chevron has managed to increase its dividend annually for 37 consecutive years despite operating in a volatile industry.
But that's not the only reason. Another key factor to consider is Chevron's balance sheet. At the end of the second quarter, the oil giant's debt-to-equity ratio was a tiny 0.15 times, the lowest among its closest peer group (and low on an absolute level, too). That gives the company the leeway to add leverage during energy downturns to support its business and its dividend. If you are an income investor looking for diversified exposure to the oil and gas sector, Chevron's 4.3% dividend yield is a good way to go if you also want to sleep well at night.
2. Enterprise Products Partners is in the energy sweet spot
That said, you could also opt to get your energy exposure in a different way. Specifically, by focusing on the one segment of the industry that isn't quite so volatile: the midstream. Businesses like Enterprise own energy infrastructure, including pipelines, storage, transportation, and processing assets. These are vital to moving oil and natural gas around the world and tend to see strong demand in both good energy markets and bad ones. That changes the equation here because Enterprise simply charges fees for the use of its assets.
That means that energy price swings aren't as big a deal for Enterprise's cash flows as they would be for an energy producer. Thus, this master limited partnership (MLP) can easily support its huge 7.3% yield. To put a number on that, distributable cash flows cover the distribution 1.7 times over right now. There's a lot of room for adversity before a cut would be on the table. And it helps to explain how Enterprise has increased its distribution for 26 consecutive years. If you want energy exposure but prefer boring investments, Enterprise has you well-covered.
3. Devon Energy is like a shot of adrenaline
OK, so you have diversified Chevron and boring Enterprise. What if you think November is going to see an oil price revival? One of the best ways to benefit will be to own a pure-play producer like upstream-focused Devon Energy. Since its top and bottom lines are directly tied to the price of oil and natural gas, well, its stock tends to rise right along with the price of oil and natural gas (and fall with energy prices, too, of course). This is not a stock for the faint of heart!
But there's one more twist here. Devon has a variable dividend policy tied to its financial performance. That means you can't really count on the 5.1% dividend yield, since the dividend is going to change from quarter to quarter. This might turn conservative dividend investors off on the stock. However, that variable dividend also means that shareholders get dividend increases when oil prices are on the rise. That can provide a hedge of sorts to your real-world energy costs. Just as your gasoline and heating costs are rising, you will likely be collecting a bigger dividend check from Devon.
Three ways to play the energy sector in November
Far too many investors think of the energy sector as one entity. But like all sectors, it is made up of individual companies. As November gets underway, you might want to consider companies like Chevron, Enterprise, and Devon, with each one being attractive for a different reason because they are all very different businesses. If you are looking at energy stocks today, you'll probably find at least one worth adding to your portfolio.
* The content presented above, whether from a third party or not, is considered as general advice only. This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.
