For those who’ve got $1,000 to take a position and are taking a take a look at the energy sector, don’t go for broke by betting on big price gains. In its place, step back and consider the longer-term history of this inherently volatile sector.
What you really need to own are corporations which have proved themselves in a position to benefiting from the industry’s ups while handily surviving its downs. On that rating, two of the most effective energy options today are ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX). Here’s why.
When oil went to zero
Throughout the early days of the pandemic, there was massive uncertainty on the earth. Countries principally shut down their economies in an effort to slow the spread of the illness.
The energy market, frightened that there may very well be an unlimited drop in demand, reacted swiftly. Oil and natural gas prices fell. At one point, West Texas Intermediate prices, a key U.S. oil benchmark, actually fell below zero! There have been technical reasons for this, but negative prices effectively meant that producers were paying people to take their oil.
In fairness, that is just not particularly common throughout the energy sector. Nevertheless it surely does highlight the emotional swings which will occur in oil and natural gas markets.
The really interesting thing about this era, nevertheless, is that ExxonMobil and Chevron each supported their dividends despite the financial headwinds they faced. The chart below shows their quarterly and annual earnings over the pandemic period.
On a quarterly basis, you’ll have the option to see the volatility of their financial results. Throughout the annual data, you’ll have the option to see that every Exxon and Chevron wound up losing money because of turbulent energy markets. But, as noted, their dividends weren’t cut, unlike the case with peers BP (NYSE: BP) and Shell (NYSE: SHEL), which each ended up cutting their dividends.
What’s so special about Exxon and Chevron?
From a business basics perspective, Exxon and Chevron aren’t materially different from other integrated energy majors. Each have globally diversified businesses. Each have assets that span from the upstream (drilling) through the midstream (pipelines) and on to the downstream (chemicals and refining).
Each of those three industry niches have different revenue and profit dynamics, which work together to melt the industry’s peaks and valleys. For a lot of investors, picking an integrated energy major goes to be the most effective alternative throughout the sector.
That said, Exxon and Chevron do have one vital thing that separates them from the pack: incredibly strong balance sheets. The two have the underside debt-to-equity ratios relative to their closest peers. Exxon’s debt-to-equity ratio is around an 0.18 multiple today, with Chevron coming in at an ever higher 0.12.
But have a take a look at the pandemic period on the graph above, and also you’ll notice that each one among the oil majors took on debt (which resulted in a rise of their debt-to-equity ratios) to survive that difficult stretch.
Exxon and Chevron had much more leeway on their balance sheets to perform that, putting them in a stronger position to deal with the extreme adversity felt during that time span. That’s what easily allowed them to proceed supporting each their businesses and their dividends through the height of the pandemic.
And provided that they still have industry-leading debt-to-equity ratios, they proceed to be the most effective positioned to deal with future adversity when — and never if — it arrives.
It’s best to probably go together with Chevron today
It will not be a mistake for long-term investors to buy Exxon directly, which is the larger of the two corporations and has an prolonged track record of annual dividend increases (42 years). For a lot of who want the biggest and best, Exxon could be the pick.
Nevertheless, Chevron has increased its dividend annually for 37 years and currently has an almost 4.2% dividend yield compared with Exxon’s 3.2%. Each should easily survive whatever the volatile energy market throws at them, but Chevron just looks cheaper directly.
So in case you’ve got $1,000 to take a position and think the energy market is the place to put it to work, don’t think exclusively about upside potential. Take into accounts balancing the upside you see against the downside that the historically cyclical industry will inevitably experience.
At any time when you are trying this, the most effective option is to decide on financially strong and diversified giants like Exxon and Chevron which have proved they may survive the industry’s volatility while still rewarding investors well for sticking around.
Do you have got to speculate $1,000 in Chevron directly?
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends BP and Chevron. The Motley Idiot has a disclosure policy.
2 No-Brainer Oil Stocks to Buy With $1,000 Right Now was originally published by The Motley Idiot