The Energy Sector Is on Fire. Is Chevron the Best Way to Play It?

Key Points

Chevron is one of the world's largest integrated energy giants.

The stock has a lofty yield, backed by a rock-solid balance sheet.

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Stocks in the energy sector have been doing very well since energy prices started to rise. The geopolitical conflict in the Middle East is a big part of the story, which should worry investors. Eventually, the conflict will end, and oil prices will fall. If you still want to buy an energy stock today, your best bet could be Chevron (NYSE: CVX). Here's why.

Chevron is diversified

When things are going well, investors often like to focus on the biggest winners. When oil prices rise, the biggest winners are likely to be upstream oil and gas producers. However, those are also going to be the biggest losers when energy prices fall, as oil prices have historically done after every oil spike. A better option is to buy a more diversified energy company, meaning an integrated energy giant like Chevron.

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Adding downstream (chemicals and refining) and midstream (pipelines) assets to its upstream assets will limit Chevron's upside, but its diversification will also soften the blow when oil prices fall. The company is built to survive through the entire energy cycle, not just the good periods. That's highlighted by the fact that Chevron has increased its dividend annually for more than a quarter-century.

Don't forget Chevron's yield and the balance sheet

Chevron's 3.8% dividend yield makes the impressive dividend streak even more attractive, noting that the S&P 500 index (SNPINDEX: ^GSPC) is only yielding around 1.1% right now. If you are a dividend investor, Chevron is the kind of stock you can buy and hold for the long-term.

An important part of that story, however, is the company's financial strength. It has a debt-to-equity ratio of roughly 0.25x. That would be low for any company and is the second lowest among Chevron's closest peers. But the real benefit is the flexibility it affords Chevron in the historically volatile energy sector. When oil prices are low, the company can lean on its balance sheet to support its business and dividend. When oil prices recover, as they always have historically, Chevron pays down debt in preparation for the next industry downturn.

Chevron is prepared for whatever comes its way

Simply put, Chevron is built to survive in a volatile sector. And despite the good news of high oil prices, the energy sector hasn't changed. It is still volatile. If you are tempted to buy an energy stock, Chevron's business provides exposure to the upside and some downside protection. And you get to collect an attractive income stream through the entire energy cycle.

Should you buy stock in Chevron right now?

Before you buy stock in Chevron, consider this:

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.