The big story in the energy sector is the shift toward cleaner alternatives, but it’s not like flipping a light switch. The energy transition will likely take decades, and there’s still ample room for oil and natural gas companies to generate profits. Here are three energy stocks you can own to generate income even as the world moves toward renewable power sources.
1. Chevron: Staying focused, for now
U.S. integrated energy giant Chevron (NYSE:CVX) has chosen to stay the course and remain focused on oil and natural gas. At least that’s its plan for now, given that its clean-energy investments so far have been fairly small. That’s not a big deal since oil and natural gas are expected to remain important parts of the energy landscape for decades to come. Meanwhile, investors can collect the stock’s generous 4.2% dividend yield, which is backed by over three decades of annual dividend increases.
What’s most notable here, however, is Chevron’s balance sheet. Its debt-to-equity ratio of 0.28 times is the lowest among its integrated-energy peers. That gives it ample breathing room to deal with the industry’s inherent commodity volatility and its ability to make acquisitions. The last big one came during 2020 when Chevron used the severe industry downturn that year to opportunistically buy a smaller competitor. That helped ensure it exited the downturn a stronger company than when it entered it. But take this one step further — at some point, when management believes it is prudent, Chevron could buy its way into the clean-energy space, too.
2. Enterprise Products Partners: Happy in the middle
The next name to consider is midstream master limited partnership (MLP) Enterprise Products Partners (NYSE:EPD). It owns a massive collection of pipeline, storage, processing, and transportation assets that would be virtually impossible to replace, largely collecting fees for the use of this massive North American-based system. As a toll taker, it is a very reliable business that isn’t as impacted by the vagaries of commodity volatility as a producer like Chevron would be. The current distribution yield is a heady 8% backed by over two decades of annual increases.
However, what’s most interesting here is that Enterprise has been working to expand its natural gas and chemicals businesses. These are likely to remain important contributors to the global economy, noting that the MLP is already the world’s largest exporter of liquid petroleum gas, a cleaner fuel source than alternatives like coal. It is also a major supplier of ethylene and propylene, two products where demand increases with a country’s economic growth. In addition to that, the company has the opportunity to use its size to make acquisitions, such as the recent agreement to buy Navitas Midstream Partners. The MLP’s fat yield will likely be the bulk of the return story here, but that’s not a massive problem when the starting yield is so high.
3. Enbridge: Shifting with the times
The last name up is Canada’s Enbridge (NYSE:ENB), another of North America’s largest midstream companies. Like Enterprise, Enbridge’s largely fee-based assets would be virtually impossible to replace. That said, there’s one major difference: Enbridge operates a sizable clean-energy business. To be fair, it only represents around 4% of earnings before interest, taxes, depreciation, and amortization (EBITDA), but that’s up from 3% a year ago.
Going from 3% to 4% in a year isn’t exactly exciting on an absolute level, but it represents a 33% increase. That’s massive and on-trend, given the increasing importance of clean energy in the world. Notably, the company has earmarked nearly a third of its near-term capital investment to this division, so the growth should continue. It has investments in a number of large offshore wind projects in Europe that are ramping up and is looking for ways to add renewable power to its own systems, reducing internal demand for dirtier energy sources. While the company works to shift along with the rest of the world, using its oil and gas businesses as a funding source, investors can collect the 6.6% yield backed by more than 25 years of annual dividend increases.
Options are available
If you think that oil and natural gas will remain key energy sources for the long haul, then Chevron is a good option for you. If you would rather avoid the ups and downs of energy prices, it might make sense to shift your attention to Enterprise. And, if you want to own a company that is still generating generous cash flows from oil and gas, but has its eye on the clean-energy future, then Enbridge could be a good choice. All three, meanwhile, will pay you well to own them with disbursements that have stood the test of time.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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