Due to a structural supply deficit and the impact of the Russia-Ukraine war, oil prices have risen of late. Exxon Mobil (XOM) and Enbridge (ENB) are two leading names.
Although both companies are in the oil and natural gas sector, their business models are different.
On the one hand, Exxon Mobil (XOM) concentrates on searching, producing, processing, and selling oil, natural gas, and derived products, including gasoline and chemicals. They have a straightforward correlation to supply/demand for the products and price changes in the mentioned commodities.
On the other hand, Enbridge (ENB) facilitates the transportation and storage of oil, natural gas, and related products. They have a more stable infrastructure with fee-based contracts. They get paid a fixed amount for transporting a specific volume of these commodities through their pipelines. As a result, their exposure to the shifts in the price for these commodities is relatively low compared to Exxon.
Both companies have been great for income investors. Exxon offers a 4.4% dividend. Meanwhile, Enbridge offers a hefty 6% dividend. In addition, both companies are Dividend Aristocrats as Enbridge has raised dividends for 27 years in a row, while Exxon has done the same for 39 years.
One concern with Enbridge is their payout ratio running at 119%. They pay a $2.69 dividend but only have an EPS of $2.25. It could be trouble in the future if they don’t increase their earnings. However, their annualized dividend growth is currently 5.48% since 2000. Their 5-year growth rate is 10%.
Meanwhile, Exxon’s payout ratio is only 65% leaving plenty of room for future increases. Their current dividend payment is $3.52 with an EPS of $5.38. Their annualized dividend growth sits at 3.20%, with 5-year dividend growth of 3%. Also, their exposure to higher oil prices could help them ramp up their dividend growth in the coming years.
Enbridge infrastructure is more of a defensive business, helping them to remain profitable during hard times like during the Covid-19 pandemic. During this time, Exxon saw its earnings drop to negative numbers in Q2 and Q3 in 2020.
Enbridge proved their excellent resilience during these challenging times, seeing their cash flow per share rise while Exxon struggled during the same period.
Fast forward to the current environment, and Exxon is forecasted to grow their earnings per share by 50%, while Enbridge’s forecast is 7% this year.
Although renewable energy is experiencing growth worldwide, the consumption of oil and natural gas will likely keep rising in the coming years. The IEA forecast natural gas demand to grow by 30% by 2040. That gives investors almost two decades of growth still in the tank. Everything else after that will largely depend on where the world is moving to as far as consumption goes.
Global oil demand will continue to grow through 2030, at least by the IEA forecasts. The trend gives the energy industry a solid outlook for the next couple of decades.
Which stock is a better buy?
Both stocks could easily continue to outperform the broad market as long as the pricing environment for energy remains as is.
If you want a significant oil price exposure and are willing to remain calm when the supply/demand for oil is down, meaning that prices could decline, leading to lower profitability for Exxon, then Exxon (XOM) is your pick.
If you want less exposure to oil prices but instead a more stable and reliable cash flow offering a solid dividend growth, then Enbridge (ENB) is your pick.
Ultimately, suppose you want exposure to both. Then, you can either buy both or something like the energy ETF (XLE), a basket of energy companies with an annualized dividend growth of 10.31% and a current dividend yield of 4%.
Now, begin your Road to Wealth!
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