2 Ways to Play the Changing Energy Industry

Energy is a broad industry that covers a lot of ground, from oil drilling to electricity. If you are looking for an energy investment, you have a huge number of options. The question is how you want to play it. Today, high-yielding ExxonMobil Corporation (NYSE: XOM) and Dominion Energy, Inc. (NYSE: D) appear to be good income opportunities, but they are taking vastly different approaches to the changes taking shape in the energy industry. Here's what you need to know to decide if one, both, or neither of these energy stocks is worth adding to your portfolio.

Sticking to the plan

Exxon is one of the world's largest integrated oil and natural gas companies, with operations in upstream drilling and in downstream chemicals and refining. That provides some balance, since downstream operations tend to perform relatively well when upstream operations are struggling, and vice versa. Exxon is also very conservatively run, with an eye toward the long term. For example, its debt-to-equity ratio of 0.12 is lower than those of all its major peers, which should allow it to weather just about any storm.

But it is still an oil and gas company, and investors are rightly concerned that these carbon-based fuels are going to be replaced by other options, like electricity. In fact, peers like France's Total S.A. have been dipping their toes into the electricity space, via investments in renewable power and even electric utilities. Not Exxon -- it's sticking to the oil and gas sector.

The energy giant's capital budget is around $24 billion this year, with plans to up that to $30 billion by 2022. And all of that money is going to its oil and natural gas, refining, and chemicals businesses. Essentially, Exxon is doubling down on carbon while peers are looking to diversify.

But the company has a reason for this: It believes that global growth coupled with a slow transition to cleaner options will mean continued demand for oil and natural gas well into the future. In fact, it expects growth in demand for both oil and natural gas through 2040. And since oil and gas wells deplete over time, it sees a need for more drilling to satisfy the demand it is projecting. Add in a roughly 4% yield -- at the high end of the company's historical yield range -- and Exxon looks even more compelling.

Distancing itself from the past

Dominion has gone a completely different direction. The company changed its name from Dominion Resources to Dominion Energy in 2017 following the successful completion of a long-term goal to exit the oil and natural gas drilling business. Today, Dominion's operations are focused on regulated electric and natural gas utilities, a renewable merchant-power business, and transmission assets that include both long-distance power lines and natural gas pipelines.

More than a decade ago, Dominion looked at the future, saw a long-term shift toward electricity, and started to shift with the times. And while its natural gas and pipeline assets are tied to carbon fuels, this particular energy source is helping the world transition away from dirtier fuels like coal. Dominion's natural gas-related businesses are still supporting a cleaner future.

Dominion isn't exactly unique in the energy space -- there are a large number of utilities following a similar game plan. That said, the company has a notable growth outlook. It has plans to spend roughly $11.4 billion between 2019 and 2021 across its portfolio of businesses, which it expects to support earnings growth of 6% to 8% a year in 2019 and 2020, with 5% growth thereafter. The dividend, meanwhile, is projected to grow roughly in line with earnings. In the utility space, those are fairly impressive numbers.

There are some complicating factors, however, including plans to absorb the company's controlled partnership and an offer to buy a financially troubled rival. Some investors are concerned that Dominion will have trouble coming up with the cash to support all of its plans. These concerns have pushed the energy company's dividend yield up to around 4.6%, a very generous yield in the utility space. Meanwhile, Dominion has been making progress on the funding front via asset sales and the decision to take on additional debt at subsidiaries such as the recently completed liquefied natural gas export facility known as Cove Point.

If you are willing to deal with a little uncertainty while Dominion executes its long-term shift toward the electricity space, it offers a very different way to play the energy sector than Exxon. And the risk-reward trade-off seems well worth the effort, with the opportunity to collect a yield that sits toward the high end of the energy industry.

All in, in different ways

When you step back, Exxon and Dominion are both making notable bets on the future. Exxon's call is that the clean-energy shift won't be as fast or dramatic as some people believe. If you think that sounds about right, then this 4% yielding energy giant might be right for your portfolio. Dominion, meanwhile, has been executing a long-term shift toward electricity. Although there's a little uncertainty surrounding its future today, the risk-reward profile seems worth the uncertainty for most investors, considering the fat 4.6% yield.

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Reuben Gregg Brewer owns shares of Dominion Energy, Inc and ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.