The last few weeks have been tricky ones for energy investors. Some oil stocks have struggled, while others have managed to rally. The market has taken each of these names on a case-by-case basis.
It’s not a terribly surprising outcome. Crude prices have snapped back from their early August lull and are back within each reach of multi-year highs. Yet investors aren’t quite sure what to make of all the sanction-war rhetoric.
Oil stocks are doubly tricky when framed against a backdrop of the energy industry’s decisions. Production remains muted in some areas, but Russia recently said it intends to keep pumping more than its fair share of oil.
For oil stock investors that can take a step back and look at the bigger picture, there are plenty of stocks to buy in the oil patch with loads of upside ahead. Here’s a rundown of the top oil stocks to buy as September’s action gets going.
Oil Stocks to Buy: Diamondback Energy (FANG)
Last month, Diamondback Energy (NASDAQ:FANG) shares plunged 12% in response to news that it would be merging with Energen (NYSE:EGN). Investors like the idea, but don’t like the price and terms of the deal. Energen is being acquired with FANG stock, translating into lots of dilution…
… but it’s actually not.
Though $9.2 billion shares of Diamondback Energy are going to be injected into the float, this is a case where the purchase is largely self-funding. Energen is already up and running. It just lacks the scale it needs to be efficient enough to keep up with the big boys. Diamondback has already proven that its deal-making is helping cash flow, which grew 30% last year thanks to the six acquisitions it made in 2017. Its commanding presence in the Permian Basin makes the company’s the ninth-largest independent player in the United States.
Oil Stocks to Buy: Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) is a name that needs no introduction. It’s one of the biggest names in the business, driving $263 billion worth of revenue over the course of the past four quarters.
Size matters in the business, if only because it means Exxon Mobil has deeper pockets and can take on initiatives — and make purchases — its smaller rivals can’t. Case in point: Just last week the company announced it had discovered its ninth pocket of crude off the cost of Guyana. It’s a discovery that may have gone unfound for years by a peer that didn’t have the funding to look in the first place.
That’s not the overarching reason XOM stock has earned a stop in a list of oil stocks to buy, however. More than anything else, Exxon Mobil is yielding 4.1%, and has doubled its payout over the course of the past ten years despite a major patch of turbulence in 2014.
Oil Stocks to Buy: MPLX (MPLX)
Source: SarahTz Via Flickr
Unlike Exxon Mobil MPLX (NYSE:MPLX) is a name that does need an introduction.
Despite the relatively unfamiliar name, MPLX isn’t so small it can be ignored. The company sports a market cap of $28 billion and is consistently profitable.
That’s largely due to the nature of its business model. MPLX is first and foremost a pipeline player, transporting crude and natural gas for companies that extract it and ultimately use it. It’s subject to changes in the price of both, as lower prices usually mean explorers and drillers produce less of it.
But, it’s always able to charge something for even more modest demand for its transport services.
The current dividend yield of 7.0% isn’t too shabby either.
Oil Stocks to Buy: Kinder Morgan (KMI)
Source: Roy Luck via Flickr
Kinder Morgan (NYSE:KMI) is another pipeline company, specializing in the midstream sliver of the oil and gas market. All told, it operates 82,000 miles of pipelines connecting 152 different terminals.
Investors may recognize the name as one linked to the perpetually-plagued Trans Mountain pipeline that would have greatly expanded, through its 70% stake in Kinder Morgan Canada, the company’s pipeline network. That headache is actually now in the rear-view mirror, with shareholders agreeing to abandon the project by selling the pipeline system to the Canadian government.
The optics of the matter, however, may have put undue pressure on KMI stock. Compared to the valuation levels of its peers, Kinder Morgan is arguably undervalued to the tune of 40%, if not more.
Oil Stocks to Buy: SRC Energy (SRCI)
Source: SMelindo via Flickr (Modified)
Don’t sweat it if you’ve not heard of SRC Energy (NYSEARCA:SRCI). Most investors haven’t. With a market cap of only $2.2 billion, SRC isn’t a name that turns a lot of heads. Nevertheless, this small explorer and producer makes for an interesting prospect for investors looking for something a little more aggressive and higher-octane among oil stocks.
One only has to look at last quarter’s numbers to see it. A bottom line of 25 cents per share was a 78% year-over-year improvement that topped earnings estimates of 23 cents per share. Revenue of $147.1 million was almost twice the top line of $75 million from the same quarter a year earlier.
Despite the incredible growth rates though, past and projected, SRCI is only valued at 10.1 times its trailing income and only 6.3 times next year’s projected per-share profits.
Oil Stocks to Buy: Enterprise Products Partners (EPD)
Source: Bilfinger via Flickr
A closer look at the company’s headlines, though, uncovers a unique aspect of its business though. That is, Enterprise Products Partners is willing and able to optimize its use of resources and assets, even if that includes sharing projects with competitors and selling certain assets to rivals.
Last month Enterprise Products announced American Midstream Partners (NYSE:AMID) was considering taking on a stake in the company’s Pascagoula natural gas processing plant.
Also last month, the company said it was looking to expand the capacity of its Seaway pipeline. It’s even considering converting a natural gas liquids line to a crude oil line to better reflect current demand.
This nimbleness is one of the reasons EPD has outperformed most of its peers so far this year.
Oil Stocks to Buy: Anadarko Petroleum (APC)
Between mid-July and early August, Anadarko Petroleum (NYSE:APC) lost 17% of its value. Since then a small piece of that setback has been reclaimed, but the bulk of that pullback has yet to be recovered. The shutdown of a couple of platforms in the Gulf of Mexico — due to a looming hurricane — isn’t exactly helping the bullish case.
Such headlines are more bark than bite though. Most drilling platforms are able to get back online pretty quickly. Ergo, the steep selloff from APC stock may be a major buying opportunity, as Anadarko Petroleum is quietly growing its footprint within the United States’ best oil-production growth area. The Permian Basin?
Nope. There’s not enough pipeline there to meet demand. The Powder River Basin is the next big thing in oil and gas, and Anadarko aims to continue deploying capital there.
Oil Stocks to Buy: Continental Resources (CLR)
When investors think of the gas and oil stocks from the exploration and production sliver of the sector, Continental Resources (NYSE:CLR) usually isn’t one of the first names they think of. That’s understandable too. Though its $25 billion market cap and TTM revenue of $3.8 billion isn’t chump change, it pales in comparison to some of the majors in the business.
Opportunity is relative though, and CLR brings opportunity to the table.
In short, Continental Resources is willing to get aggressive. A month ago the company confirmed it was budgeting an extra $400 million worth of capital expenditures for this year, bringing the total to $2.7 billion.
It may be worth the commitment though. Production was up 25% during the second quarter, and the company expects 2019’s output to grow by as much as 20%.
Oil Stocks to Buy: EQT Corporation (EQT)
It’s more of a natural gas company than a crude oil player, but the two tend to travel hand-in-hand. As such, EQT Corporation (NYSE:EQT) has also earned a spot on the market’s top oil stocks to buy.
EQT is usually classified as an explorer and producer, and it certainly does plenty of both. It’s a categorization that doesn’t do the company justice though. EQT is also a midstream/pipeline company, operating nearly 1000 miles worth of pipeline.
The benefit of this kind of diversity can’t be underscored enough. While both business models are subject to the ebb and flow of crude and gas prices, handling its own materials sets the stage for greater efficiency and better total profitability.
It booked a loss for the first quarter, to account for impairment charges related to properties in the Permian and Huron areas. That was a one-time thing though, and next year’s projected earnings of $2.46 per share would sustain a lengthening string of top and Bottom line growth.
Oil Stocks to Buy: McDermott International (MDR)
Last but not least, add energy infrastructure outfit McDermott International (NYSE:MDR) to your list of oil stocks to consider sooner than later.
MDR shares have dished out an unusually poor performance in recent months, currently down 28% from its January peak. Usually, that kind of weakness would coincide with sinking revenue and earnings and/or a grim outlook. Neither would apply to McDermott though. The top and bottom lines are both in uptrends, and analysts are looking for strong growth on both fronts next year.
Those same analysts, by the way, collectively believe MDR shares are worth $27.18 per share, up 46% from the stock’s current price of $18.60. It looks like the forward-looking P/E of 9.2 has not gone unnoticed. That, or they’re betting big on the benefits of the upcoming merger with Chicago Bridge and Iron.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.