The volatility in the energy patch these days is enough to make investors reach for the Valium.

For investors who want to bet on energy without the risk of losing their shirts, now is the time to focus on quality companies with fortress-like balance sheets.

That is why Warren E. Buffett's favorite energy stock, refiner Phillips 66 (PSX) - Get Report , looks particularly enticing.

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It is one of the best defensive growth stocks in the turbulent energy patch, and the stock's high dividend is the icing on the cake.

Oil prices continually seesaw, sharply up one day and down the other.

Meanwhile, encouraged by generally higher oil prices, certain heavily indebted energy companies are expanding and taking on more debt, betting on the price of oil to keep rising. These are the energy stocks to avoid.

A prime example is Anadarko Petroleum, whichthis week said that it would pay $2 billion to buy Freeport-McMoRan's deep-water oil and gas assets in the Gulf of Mexico.

Never mind that Anadarko Petroleum's total debt stands at $17.52 billion, for a total debt-equity ratio of 120.01. That is monstrously high, compared with the average debt-equity ratio of 24.5 for the oil and gas drilling and exploration industry.

Oil prices happen to be on the upswing, but as we have seen, this recovery doesn't necessarily have momentum. Oil prices could easily start falling again.

The fact is, oil's go-go days are over.

During the oil boom in the early days of the economic recovery, oil prices reached an astonishing high of $110 a barrel in 2014. Energy companies of all stripes recklessly borrowed money to expand production, which seemed like a good idea at the time.

The shale production revolution in North America turned the U.S. into the world's largest producer of oil. The U.S. actually dethroned Saudi Arabia as the king of oil producers, something many thought wouldn't occur during their lifetimes.

Then the bottom fell out, and oil embarked on a protracted decline, with prices plunging to as low as the $20s in February. Now, oil prices are hovering at at about $50 a barrel, the threshold that energy companies need to break even.

But it is a precarious rally, and triggers for another correction lurk everywhere around the globe.

Raymond James & Associates recently forecast that oil is likely to reach at least $80 a barrel by the end of next year, as demand picks up and the global oil glut eases.

Meanwhile, some influential energy traders see lower, not higher energy prices.

But Buffett, the world's greatest value investor, knows that Phillips 66 is resistant to these uncertainties.

Diversification, combined with low costs, is the key to the company's strength.

Phillips 66 operates through four segments: chemicals; marketing and specialties; midstream; and refining. This diversification allows Phillips 66 to weather unfavorable conditions in any one market.

A major holding of Buffett's Berkshire Hathaway, Phillips 66 also reaps high margins from its value-added refining and chemicals activities, which benefit from economic growth and are less susceptible to oil price swings.

The company's debt-equity ratio is just 36.82, one of the lowest in the energy patch. Its trailing 12-month price-earnings ratio of about 13 is about in line with the P/Es of its peers. 

With the stock trading at about $79, the average analyst one-year price target is about $83, which would represent a gain of 5%.

However, as Phillips 66 launches several large-scale projects this year and next, some analysts are considerably more bullish.

Cowan recently raised its rating to outperform, with a one-year price target of $92, which would represent a gain of nearly 17%.

With a dividend yield of 3.26%, Phillips 66 is a stable growth-and-income choice in an energy market that is incessantly unnerving investors.


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John Persinos is an editorial manager and investment analyst at Investing Daily.

At the time of publication, he didn't own any of the stocks mentioned.

Persinos appears as a regular commentator on the financial television show "Small Cap Nation." Follow him on Twitter.