Beat the Rout in Crude With 2 Top Energy Buys

Despite significantly weaker oil prices, Enbridge Inc. (TSX:ENB)(NYSE:ENB) is one of the stocks that should be a part of every investor’s portfolio.

| More on:

The sharp sell-off of oil stocks continues as companies slash capital expenditures and dividends thanks to cash flows coming under increased pressure. However, it is not all doom and gloom in the patch, with a number of companies set to remain profitable and weather markedly lower crude prices. Two that standout for very different reasons are Enbridge Inc. (TSX:ENB)(NYSE:ENB) and Suncor Energy Inc. (TSX:SU)(NYSE:SU).

Why Enbridge?

Enbridge is Canada’s largest provider of midstream and transportation services to the energy patch. It is responsible for shipping over half of all crude exported from Canada to the U.S. This places it in the unique position of being a key link between the energy patch and crucial refining markets. As a result, it is able to collect a toll on every barrel of crude and every cubic metre of natural that it transports. These tolls can only continue to grow as Canadian crude production grows over the long term.

More importantly, Enbridge continues to retain a solid competitive advantage because its business is almost impossible to replicate. Not only does it require a significant capital investment to construct the pipeline network and supporting infrastructure, but there are also substantial regulatory barriers to overcome. These factors bode well for increasing volumes of crude to be transported, supporting future earnings growth while protecting earnings stability.

The end result is that Enbridge is well positioned to remain profitable despite the rout in oil prices, thereby protecting its dividend and increasing the likelihood of future dividend hikes. The resilience of its business has already allowed it to hike its March 2014 dividend payment by 33% at a time when many energy companies are cutting theirs. This is the 20th straight year that Enbridge has hiked its dividend, giving it a 3% dividend yield and an impressive compound annual growth rate of almost 11% over that period, or more than three times the annual average rate of inflation.

Such a solid record of dividend hikes makes Enbridge every income investors dream.

Why Suncor?

Suncor, as an integrated energy major, could not be more different from Enbridge, yet it too remains profitable despite weaker oil prices, and it is well positioned to weather the current operating environment. Suncor’s fourth quarter 2014 results were disappointing, with cash flow down by 37% compared to the same quarter in 2013 and operating earnings down by a massive 60% for the same period.

Nonetheless, Suncor remained profitable, and these weak earnings were attributable to the rout in oil prices rather than any failure on Suncor’s part.

Key among Suncor’s strengths are its high quality and long reserve life portfolio of oil assets combined with a fortress balance sheet. It is these aspects of its operations in conjunction with its refining business that leave it well positioned to withstand lower crude prices. This is because as crude falls in price, the margins in Suncor’s refining business increase, which is also the key reason for the company now boosting refinery throughput and utilization rates.

However, the real reason investors should consider Suncor is its dividend. While it only pays a moderate yield of 3%, it certainly appears sustainable, with a conservative payout ratio of 54%. This leaves sufficient fat to absorb lower crude prices before cash flow and the dividend are affected. 

Now what?

Both companies are very attractive propositions for weathering the rout in crude prices and positioning for the much anticipated rebound. Both have long track records of rewarding patient investors with steadily growing dividends and appear attractively priced at this time, which makes both companies a solid addition to any portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. 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, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Dividend Stocks

Dividend Stocks

10 Years From Now, You’ll Be Glad You Bought These Magnificent TSX Dividend Stocks

The TSX is lucrative to buy these magnificent dividend stocks in bulk and be proud of this decision 10 years…

Read more »

calculate and analyze stock
Dividend Stocks

4 Fabulous Dividend Stocks to Buy in July

Are you looking for long-term income? These four dividend stocks should not only provide you with value in July but…

Read more »

financial freedom sign
Dividend Stocks

5 Steps to Financial Freedom for Canadian Millennials

Follow these steps and nothing can stop Canadian millennials from achieving their early retirement dreams.

Read more »

Investor wonders if it's safe to buy stocks now
Dividend Stocks

We’re Only Getting Older: A Top TSX Stock That Benefits From an Aging Population

For a bet on the aging population, consider this small-cap stock with growth potential.

Read more »

Growing plant shoots on coins
Dividend Stocks

Yield Today, Growth Tomorrow: 3 Stocks to Keep Building Your Wealth

For investors seeking yield today and growth tomorrow, these top Canadian dividend stocks are certainly worth considering right now.

Read more »

Payday ringed on a calendar
Dividend Stocks

This 10.72% Dividend Stock Pays Cash Every Month

This dividend stock remains a consistent, defensive dividend producer that will give up over 10% in income each and every…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA Investors: 2 Standout Domestic Stocks With 7% Yields

These top dividend-growth stocks look oversold.

Read more »

Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Despite their recent declines, the long-term growth outlook of these two top dividend stocks remains strong, which could help their…

Read more »