Oil prices are falling, which makes now a good time to reassess how best to approach investing in the sector.
In its August short-term energy outlook, the U.S. Energy Information Administration (EIA) lowered its full-year target price on Brent crude oil (the international benchmark) from $86 to $84 per barrel. The EIA remains optimistic that crude oil prices will rise in the coming months, but also expects lower oil consumption.
Oil demand tends to rise when global economic output increases. But the relationship between the economic cycle and oil prices can vary from region to region based on the level of economic development and climate policy.
Despite some headwinds for oil prices, here's why these Fool.com contributors think Enbridge (NYSE: ENB), Equinor (NYSE: EQNR), and Vitesse Energy(NYSE: VTS) are three dividend stocks in the energy sector to buy now.
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Enbridge: A midstream leader with nearly three decades of boosting its dividend
Scott Levine (Enbridge): Oil prices may be slipping, but that's no reason to shy away from leading energy stocks like Enbridge -- a company that transports about 30% of the crude oil produced in North America and nearly 20% of the natural gas used in the U.S.
In fact, the stock is attractively valued right now, providing income-seeking investors with a great opportunity to load up on a leading pipeline stock that has demonstrated a steadfast commitment to rewarding shareholders, boosting its dividend for 29 consecutive years, and sporting a forward dividend yield of 6.9%.
While shares of upstream and downstream companies are sensitive to energy prices, Enbridge exhibits more resilience. The company operates oil and natural gas pipelines and storage facilities, which generate strong, dependable cash flows. Enbridge signs long-term contracts with customers, helping to protect it from energy price volatility. In addition, Enbridge has regulatory-based cost-of-service arrangements in place to help reduce risk.
This business model provides management with solid foresight into future cash flows -- which, in turn, helps it plan for dividend raises and other capital expenditures such as acquisitions. Management, for example, projects distributable cash flow -- $11.3 billion as of 2023 -- to grow at a 3% compound annual rate through 2026.
Trading at 9 times operating cash flow, Enbridge stock is priced at a slight discount to its five-year operating cash flow multiple of 9.2. It may not represent a screaming buy, but not every stock purchase has to be. Enbridge is a compelling choice for folks digging in the oil patch for a reliable, low-risk, dividend stock.
Equinor: An energy major worth buying now
Daniel Foelber (Equinor): Investors have been penciling in Aug. 28 as a noteworthy date because it's when market darling Nvidia is set to release its fiscal 2025 second-quarter results. But it's also the date when Norwegian energy giant Equinor will distribute a whopping $0.70 per share in dividends to holdings of American depositary receipts (ADRs) on the New York Stock Exchange -- translating to an annualized yield of 10.4% based on Equinor's share price of around $27.
ADRs offer a way for U.S. investors to buy shares of foreign companies like Equinor, Toyota Motor, etc., on an American exchange.
Equinor's ordinary quarterly dividend is $0.35 per share, but it is also paying an extraordinary dividend of $0.35 per share based on its business performance. In 2022, it paid $2.90 in total dividends per share, followed by $3.40 in dividends per share in 2023.
Anytime a company has an abnormally high yield like Equinor, it's best to approach the investment opportunity cautiously to ensure the company can afford the dividend expense and understand why the yield is so high. In Equinor's case, the company has been crystal clear about its large capital return program to shareholders through both buybacks and dividends.
Unlike other oil majors that are ramping up capital expenditures and/or making high-profile acquisitions, Equinor is keeping a tight lid on spending as it works to diversify its business and invests in renewable energy. The company's oil and gas assets are a cash cow, and Equinor is directly passing along profits to shareholders -- including plans for a whopping $14 billion in buybacks and dividends in 2024 -- which is 18.6% of Equinor's market value.
Equinor is an excellent choice for investors who agree with its plans to reduce domestic oil and natural gas production and achieve its ambitious carbon-reduction goals. However, if you're looking for companies that are aggressively boosting oil and gas production, you may prefer ExxonMobil or ConocoPhillips instead.
Vitesse Energy: An energy company where the dividend comes first
Lee Samaha(Vitesse Energy): Trading at an 8.6% dividend yield at the time of writing, Vitesse Energy is an oil and gas exploration and production company operating an unusual business model. Instead of owning and operating assets, management prefers to buy interests in wells operated by other leading oil and gas companies like Chord Energy, Hess, and EOG Resources.
As of August, it held interests in 7,018 wells with "an average working interest of 2.8% per working interest well." The strategy diversifies risk in any one well and also gives flexibility to management as it's not encumbered with drilling obligations as an operator.
On the other hand, most of its assets are in the Bakken oil field in North Dakota, and the model requires management to keep growing production through successfully appraising and acquiring assets. It's also an asset-light model, so Vitesse doesn't have significant ongoing maintenance capital investment requirements.
In addition, management follows a discretionary policy of hedging its oil production to protect the dividend. This policy can be good because it dilutes the stock's risk from exposure to the price of oil and strengthens Vitesse's exposure to what it does best: growing oil and gas production.
That said, there's still a discretionary element here, and investors rely on management to offset any significant oil price weakness. Perhaps the best way to think about Vitesse is as a stock likely to do well outside of a sharp oil price decline. That makes it attractive as part of a diversified portfolio of high-yield stocks.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chord Energy, EOG Resources, Enbridge, Nvidia, and Vitesse Energy. The Motley Fool recommends Equinor Asa. The Motley Fool has a disclosure policy.
