The Best Energy Stock to Buy With Oil Near $105 Isn't an Oil Producer

Enterprise Products Partners (EPD +1.12%) operates in the energy sector, but its success is not determined by oil prices. This is crucial to consider when evaluating energy stocks, especially as oil prices have risen to around $105 per barrel. In the past, oil prices were significantly lower than this. The energy sector is typically divided into three parts: upstream (production), midstream (pipelines), and downstream (chemicals and refining).

The upstream and downstream segments are highly sensitive to commodity prices. In contrast, the midstream sector serves as a bridge between the upstream and downstream, connecting them to the rest of the world. Companies like Enterprise primarily charge fees for utilizing their energy infrastructure assets, making the volume of energy flowing through their systems more critical than the commodity price.

Midstream businesses are relatively unexciting compared to upstream and downstream operations. Enterprise, in particular, is one of the most unassuming midstream operators in North America. The company has focused on steady and slow growth, a strategy that has been evident for 28 years since its initial public offering. This consistent growth is reflected in its distribution, which has increased annually.

Enterprise's distribution growth has historically been in the low to mid-single digits. This slow and steady approach is particularly appealing in a sector known for its volatility. Furthermore, Enterprise has an investment-grade-rated balance sheet. The company's distributable cash flow has consistently covered its distribution by 1.7 times in recent years.

The company has also allocated $6.5 billion in capital investments through 2029, indicating a continued commitment to steady growth. Among the most intriguing aspects of Enterprise is its approximately 6% distribution yield, which is significantly higher than the average return you would expect from the broader market. Unlike upstream and downstream investments, which fluctuate with oil prices, Enterprise's yield remains stable and has grown steadily for decades.

This stability provides investors with a reliable and above-market return. Historically, when oil prices rise due to geopolitical tensions in the Middle East, investors may find that owning Enterprise is less risky. If the situation returns to normal, the oil prices are expected to decrease. Therefore, investing in Enterprise offers a compelling opportunity for those seeking a dependable income stream with minimal exposure to the volatility of oil prices.

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