Oil Could Drop Fast If the Iran Talks Succeed. Here's How to Hedge Your Energy Portfolio.

Energy industry executives continue to warn that investors are underestimating the impact of the ongoing geopolitical conflict in the Middle East. That may be true, but it's just another sign that investors are reacting emotionally. That's not unusual on Wall Street and suggests that a breakthrough in the ongoing negotiations between the United States and Iran could lead to a swift decline in oil prices. What should you do to protect against this outcome?

Leaning into oil prices could be a mistake

If you are looking to leverage oil price moves, the best choice is likely an upstream oil and gas producer. A solid option is Devon Energy (NYSE: DVN). The company is U.S.-based, too, so its production hasn't been impacted by the conflict in the Middle East. It simply benefits from the higher energy prices created by the conflict.

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The problem is that it will also suffer directly when oil prices eventually fall, as they always have historically after large price spikes. If you want oil exposure, but want to soften the blow of an eventual oil price retreat, a diversified integrated energy company like Chevron (NYSE: CVX) will probably be your best bet. Chevron won't completely avoid the impact of falling oil prices, but the company's midstream (pipeline) and downstream (chemicals and refining) operations should help to soften the blow.

The real hedge is the midstream

That said, the big investment winner from this difficult period could be North American midstream businesses, such as Enterprise Products Partners (NYSE: EPD), Energy Transfer (NYSE: ET), Kinder Morgan (NYSE: KMI), and Enbridge (NYSE: ENB). All of them own energy infrastructure assets for which they charge usage fees, often to energy companies such as Devon and Chevron.

The big difference is that businesses like Enterprise are more concerned with the volume that flows through their systems than the price of what is being moved. Given the importance of oil and natural gas to the global economy, volumes tend to remain resilient throughout the energy cycle. That's how Enterprise can support its lofty 5.5% distribution yield, which is backed by 27 consecutive annual distribution increases. When other investors are worried about oil prices and stock prices, you can focus, instead, on your reliable distribution checks.

The long-term opportunity could be huge

There's another story that could make a midstream investment like Enterprise even more attractive. If the conflict in the Middle East leads countries to reconsider energy security, the United States and Canada could see increased energy demand from abroad. That would mean more volume and growth opportunities for businesses like Enterprise. In the end, that could make a midstream investment the best energy hedge of all for long-term focused dividend lovers.

Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron, Enbridge, and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.