If You Like Enbridge Stock, Then You’ll Love This High-Yield Oil Stock

Enbridge (TSX:ENB) stock has been a longstanding stock for dividend payouts. But we’re not so sure that will continue to be the case.

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Enbridge (TSX:ENB) has been a strong investment in the past. This comes down to its steady cash flow from long-term contracts and its reliable dividend payouts, thereby making it a favourite for income-seeking investors. Its extensive pipeline network provides stable revenue, which has historically supported generous yields. However, as the energy sector evolves and competition grows, some high-yield oil stocks might offer better opportunities for growth and dividends.

Companies more focused on upstream activities, like oil exploration and production, could present higher potential returns, especially as oil prices fluctuate, making them worth considering for investors seeking more aggressive growth. Should investors ditch Enbridge stock?

Into Enbridge

Enbridge stock has faced a number of challenges in the past despite its strong track record as a dividend-paying stock. One of the recurring issues has been regulatory hurdles, particularly related to its pipeline projects. This includes delays in obtaining permits and opposition from environmental groups. These obstacles can slow down projects and impact profitability, as seen with past pipeline expansions that have faced legal challenges. Moreover, fluctuations in oil prices, which Enbridge is sensitive to despite its diversified operations, have also added a layer of uncertainty to its earnings.

More recently, Enbridge has made significant strides toward renewable energy. This includes a partnership with Six Nations to develop the Seven Stars Energy wind project. While this project marks a positive shift toward cleaner energy, it presents its own set of challenges. These include securing long-term power-purchase agreements and meeting environmental approvals. These delays could push back the project’s expected operational date of 2027, making it harder for Enbridge to quickly capitalize on its renewable investments.

Another concern is Enbridge’s rising debt levels, particularly following its recent acquisitions in the U.S. gas utilities space. Although these moves aim to diversify its business and reduce reliance on oil, they have increased the company’s debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio. This could strain future cash flow if interest rates rise further. Coupled with high financing costs, these factors could impact Enbridge’s ability to continue growing dividends at the same pace investors have come to expect.

Consider Parex

Parex Resources (TSX:PXT) could be a better option for investors seeking high yield and growth potential in the oil and gas sector. The company has maintained solid financial health, with a strong operating margin of 45%. This allows it to generate consistent cash flow even during market fluctuations. In the second quarter of 2024, Parex reported an impressive operating netback of $46.32 per barrel of oil equivalent (boe), reflecting its ability to produce oil at a lower cost. And this directly boosts profitability.

Furthermore, Parex has focused on strategic production growth and operational efficiency. With key assets like the LLA-34 and Cabrestero blocks, Parex is positioned for future expansion, particularly with its successful water flood injection patterns that promise higher yields. The company has also shifted capital to high-performing areas like Capachos, thereby demonstrating its adaptability and potential for long-term production increases, which can result in higher dividends for shareholders.

Finally, Parex stands out with a significant dividend yield of nearly 13% at writing. Coupled with a low payout ratio of 36.87%, it has plenty of room to maintain or grow its dividends. This makes Parex a strong option for income-seeking investors who want exposure to oil and gas with the added benefit of reliable cash returns.

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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge and Parex Resources. The Motley Fool has a disclosure policy.

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