In recent times, the energy market has experienced significant fluctuations, with oil prices showing volatility that has led to notable declines in the stock prices of major players like Occidental Petroleum (NYSE: OXY). In fact, OXY’s share price has dropped about 25% from its recent peak, while its dividend yield has dwindled to a modest 1.7%. For investors focusing on income opportunities within the energy sector, there are more attractive options available, such as Enterprise Products Partners (NYSE: EPD), which boasts a robust distribution yield of 7.1%. Here’s an in-depth look at why prioritizing EPD could be a smarter investment strategy.
Occidental Petroleum has established itself as a substantial entity in the energy landscape, akin to industry titans like ExxonMobil and Chevron, which are recognized for their integrated operations that span the entire energy production spectrum—from extraction and transportation to refining. This broad operational model helps buffer the financial impacts that typically accompany the volatility of the energy sector. However, Occidental’s aim to compete with such giants necessitates a growth strategy largely reliant on acquisitions, evident in its past dealings, particularly its substantial acquisition of Anadarko Petroleum in 2019.
The move—backed by Warren Buffett’s Berkshire Hathaway—was ambitious but came with its own set of challenges. The need to finance such a hefty purchase led to increased leverage, and when oil prices plummeted during the pandemic, Occidental was forced to retract its dividend, which affected investor confidence. Although the dividend has seen some recovery, it remains significantly lower compared to its pre-cut level as the company shifts its focus towards expansion rather than direct returns to shareholders.
In stark contrast, Enterprise Products Partners represents a compelling alternative for those seeking both stability and income. As a master limited partnership (MLP), EPD is engineered to provide a structured income stream to its investors while maintaining tax efficiency. Its operational focus is centered around the midstream sector—owning and managing the vital pipelines and infrastructure that facilitate energy transportation. This positioning allows EPD to generate steady cash flows, insulated from the volatile commodity price fluctuations since it relies on the volume of energy transported rather than the prices of those commodities.
Enterprise Products Partners has a strong balance sheet with an investment-grade rating, sustaining its distribution with robust cash flow coverage—currently at 1.7 times the distribution payout. Importantly, EPD has consistently increased its distributions for 26 consecutive years, catering effectively to dividend-seeking investors looking for reliability in their portfolios. Consequently, with a modest growth projection of around 3% annually, the total returns regarding income can effectively approach 10%, aligning with broader market expectations.
Moreover, a comparative analysis of stock performance between Occidental and Enterprise Products Partners showcases this disparity vividly. During declining oil prices, Oxy’s stock has mirrored the trends of West Texas Intermediate (WTI) crude prices, reflecting heightened sensitivity to market fluctuations. In contrast, EPD has managed to maintain its trajectory and appeal, making it an attractive choice for risk-averse investors keen on fostering wealth even amidst unpredictable market conditions.
Ultimately, while Occidental Petroleum is a competent player within the energy sphere, it has exhibited considerable volatility, making it potentially unsuitable for conservative investors. Those in search of a dividend-centric investment with lower risk should gravitate towards Enterprise Products Partners for its steadfast income foundation and growth potential.
If you’re contemplating an investment of $1,000 in Occidental Petroleum right now, it’s crucial to carefully evaluate your options. Recent recommendations by investment analysts highlight the emergence of other stocks with greater potential for growth, as Occidental Petroleum does not appear to be among those favored investments at present.
In conclusion, while Occidental continues to strive for dominance in an ever-changing market, the enduring appeal of companies like Enterprise Products Partners lies in their stability and commitment to shareholder returns. Embracing such investments may very well allow investors to not only safeguard their portfolios but also leverage the ongoing demand for energy in a manner that promotes sustainable growth and wealth generation.