There’s a saying that the best offense is a good defense. That’s probably a good way to think about the energy industry because it is inherently cyclical, leading to soaring booms and painful busts. Enterprise Products Partners (EPD -0.38%) and ExxonMobil (XOM -1.46%) exemplify this approach. If you are looking to put money to work in the energy industry right now, both can be had for less than $200 a share.
Avoiding the issue
The big problem when it comes to investing in the energy sector is the commodity-driven price swings that take place. A lot of companies will see their top and bottom lines soar during good years only to plunge during bad years. Their stocks tend to follow along for the ride, which can be very disheartening for long-term investors.
Enterprise Products Partners, a master limited partnership (MLP), largely sidesteps this issue. It owns a massive collection of midstream assets, which are used to move, store, and process energy. Think of very expensive to build, but long-lived and vital assets like pipelines, without which the global energy market couldn’t function. The key, however, is that Enterprise charges its customers fees for the use of its assets. The actual commodity prices of what flows through its system are much less important than the demand for the pipes, storage, processing, and transportation infrastructure it owns.
The benefit of this can be seen in the 24 consecutive years of annual distribution increases the MLP has under its belt. There’s more to like here, though, because Enterprise’s distributable cash flow covered its distribution by 1.9 times in the fourth quarter of 2022. That means there’s a huge amount of room for adversity before a distribution cut would be needed.
The downside is that distribution growth is likely to be modest going forward because growth opportunities in the midstream arena aren’t huge. After a long period of rapid expansion, most of the best opportunities are pretty much gone. From here on out, it’s more likely to be incremental growth. So the fat 7.6% distribution yield is going to make up the vast majority of your return.
The foundation is key
Exxon is a totally different story, given that its top and bottom lines are heavily reliant on the ups and downs of energy prices. Right now the company is reporting record results thanks to generally advantageous oil and natural gas prices. That is already changing, with both natural gas and oil prices well off recent peaks. In fact, there’s a pretty good chance that 2023 earnings will fall from 2022 levels.
There’s two things that energy investors need to keep in mind before crossing this international energy giant off their list. First, despite the cyclical nature of the energy sector, Exxon has increased its dividend annually for 40 consecutive years. Clearly, the company believes strongly in returning value to shareholders via a steadily growing dividend in both good oil markets and bad ones.
Second, one of the key ways Exxon manages to support its dividend, even when the oil industry is in a downturn, is through the maintenance of a strong balance sheet. Essentially, when times are tough, the company takes on debt to help fund its business and support its dividend. When the good times return, management pays down the debt that was taken on. That’s exactly what has taken place over the last few years.
Numbers will help here. In 2019, the debt-to-equity ratio stood at around 0.2. After the 2020 industry downturn, precipitated by a decline in demand as global economies shut down to fight the spread of the coronavirus pandemic, the debt-to-equity ratio peaked at a bit over 0.4. And, now that good times have returned, the debt-to-equity ratio is back down to 0.2 or so. All told, if you are considering oil companies, Exxon is probably one of the safest ones you can buy today. The stock yields a fairly attractive 3.3% compared to the 1.55% you’d get from an S&P 500 index ETF.
Play it safe
Enterprise is a solid option for investors looking to maximize the income their portfolios generate today, and the business should hold up well even if energy prices plunge anew. Exxon, meanwhile, is a solid option for investors who want exposure to energy prices (they could go back up) but are looking to keep the risk of a dividend cut to a minimum. Both can be bought for less than $200 a share, making them easily accessible to almost any investor.