Warren Buffett's portfolio contains a number of energy companies, including both utilities and oil and natural gas production companies. It's an admission of the important role that energy plays in the modern world. If you are looking at Buffett's portfolio at Berkshire Hathaway(NYSE: BRK.B), one energy company that even conservative investors with as little as $500 might want to add to their portfolios is Chevron(NYSE: CVX). Here are some key reasons why.
1. Oil demand is not going away
According to the Energy Information Administration, the International Energy Agency, and OPEC, demand for carbon fuels will continue to be robust through at least 2050. The biggest shift will be a trend away from coal, the dirtiest of the major carbon fuels, and toward natural gas, the cleanest. Oil demand will be higher, too, but it will not grow as quickly as natural gas. All in, neither oil nor natural gas is going away, largely thanks to a still-growing world population.
With this backdrop, it is clear that oil and natural gas companies are going to be important providers of energy. Chevron is an integrated energy giant with a market cap of over $300 billion. It has been producing oil and natural gas for a very long time and has highly efficient operations. If there is a need for oil and/or natural gas, it is well positioned to produce the fuels.
2. Chevron is financially strong
There are a lot of energy companies in the world, however, even some very large ones that rival Chevron in scale. But one thing that separates Chevron from similar peers is its impressive financial strength. To put a number on that, Chevron's debt-to-equity ratio is roughly 0.14 times. That would be low for any company.
But Chevron's debt-to-equity ratio also happens to be the lowest in its direct peer group, as the chart above shows. This is important because oil and natural gas are commodities prone to dramatic and often swift price swings. Excessive debt reduces a company's strategic options when times get tough. Chevron, given its financial strength, has more choices during the inevitable industry downturns it will face. That's something conservative investors should greatly appreciate.
3. Chevron has a strong playbook
Just having choices isn't enough, however; a company has to show that it knows what to do. And Chevron did just that during the oil downturn spurred by the economic shutdowns used to slow the spread of the coronavirus in 2020.
As the graph above shows, when oil prices declined in 2020, crimping Chevron's earnings, it took on more debt and increased its leverage. That cash was used to keep the business going and to continue paying dividends to investors (more on this in a second). Just as important, when energy prices recovered, Chevron reduced leverage so it would be prepared for the next industry weak spot. So not only does Chevron have a strong financial foundation, but it has proven willing to use that strength when needed.
4. Chevron puts investors first
As noted, one of the things Chevron did during the last downturn was support its dividend. The company's earnings dipped into the red, so it could have easily justified a dividend cut. It did not, though, preferring instead to increase the dividend just like it has every year for over three decades. Through good energy markets and bad ones, Chevron has continued to increase its dividend annually. This is notable for a couple of reasons.
First, it shows that the company knows how to navigate a highly volatile industry. Second, and perhaps more importantly, it proves that the company places a high value on the needs and desires of its shareholders. There are other energy stocks out there, some with dividend policies that effectively rise and fall along with oil prices. However, the board of Chevron is well aware that conservative income investors buy its stock because they expect a consistent and slowly growing dividend. And that is what they have made sure shareholders get.
An all-around great energy stock for conservative income investors
There are other things to like about Chevron, like its growing production profile and the current guidance that it will continue to improve the returns on the capital it invests. It's also working to improve its own environmental footprint. Such things will ebb and flow over time.
The bigger picture is what Buffett generally looks at. And from that perspective, Chevron operated in an industry that is out of favor but will remain important for years. It has a large and financially strong business. It has proven it can use its financial strength to muddle through difficult times. And it continues to put investors first with a steadily increasing dividend. If that sounds like a good combination of traits, then you might just be channeling your inner Warren Buffett.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.