Warmer weather is (finally!) showing up around the country, and the energy markets seem to be warming up as well, with oil prices hitting their highest levels all year and domestic production of oil and gas continuing to increase. That makes now a great time to look into energy stocks.
We asked three of our Motley Fool contributors what their top picks are in the energy industry right now. They came back with Kinder Morgan (NYSE: KMI), ExxonMobil (NYSE: XOM), and Magellan Midstream Partners (NYSE: MMP). Here's why they think these are particularly good buys right now.
Growth may be in the pipeline for these three top oil and gas industry stocks. Image source: Getty Images.
Firing on all cylinders
John Bromels (Kinder Morgan): All the things I love about natural gas pipeline operator Kinder Morgan (and one thing I can't stand) were on display in its recent first-quarter 2019 earnings report, and that makes it my top energy stock to buy right now.
First, the good things: Kinder Morgan continued to execute well, fulfilling its promises to make money, return cash to shareholders, and reduce debt. Distributable cash flow was up 10% over the year-ago quarter, to $1.4 billion, slightly exceeding the company's outlook. It upped its quarterly dividend by 25% -- as promised -- to $0.25 per share. It also used cash from the sale of its Canadian Trans Mountain pipeline to pay down $1.3 billion of debt. All of this was in line with or slightly ahead of expectations.
And then the thing I can't stand happened: Despite hitting these marks, the stock price tumbled anyway, dipping below $19.50 a share. This isn't entirely surprising as the market has been skeptical of the company since it slashed its dividend in 2015, and has been slow to acknowledge the positive changes Kinder Morgan has made since.
While the price drop isn't good news for those of us who already own Kinder Morgan, it represents an opportunity for those looking to buy into this well-run pipeline company.
Another bite at the apple, er, Exxon
Rich Smith (ExxonMobil): Four months ago, I picked ExxonMobil as my top energy stock to buy right ... then, in November -- and the more the calendar changes, the more the arguments for buying ExxonMobil stock stay the same.
When that article ran on Nov. 9, a barrel of WTI crude oil was selling for $60.19. Today, that same barrel of black gold can be had for $60.18. Similarly, ExxonMobil's stock price, which, sitting at $81.32 as I pen these words, is within mere pennies of what the stock cost back then. All of this has me thinking: If ExxonMobil looked like a buy back in November, shouldn't it still be a buy today?
After all, if anything's changed in the investment case for Exxon, it's that the momentum of the oil market has improved. In the middle of a steep decline back in November, oil prices have now been on a tear, rising 42% from their $42.53 nadir hit on Christmas Day. (That's good news for a company that sells oil.)
Little wonder that analysts remain optimistic about the prospects for Exxon, as they are forecasting nearly 19% annualized profit growth over the next five years for this 16.5 P/E stock. That's cheap, even before you factor in the 4.1% dividend yield. And Exxon's quality of earnings has rarely been higher, with free cash flow backing up nearly 80% of reported earnings.
As much as I liked Exxon then, I still like it today.
A 6.6% yield with a long growth runway to go
Tyler Crowe (Magellan Midstream Partners): A business like moving oil and gas around in pipelines isn't one that grows at eye-popping rates, but it's an industry with lots of growth potential over the next few years as North America continues to grow production from shale. This production surge is opening up growth avenues that few ever thought possible such as a booming petrochemical industry and crude oil export capacity.
For those looking to ride this large but slow-moving wave, Magellan Midstream Partners is one worth looking at. For one, the company has a stellar record of steadily growing investor payouts through the ups and downs of the oil and gas industry without compromising its balance sheet. At the end of the most recent quarter, the company had raised its payout for the 67th consecutive time while maintaining the lowest debt leverage (as measured by debt to EBITDA) in the midstream industry.
Magellan's plans to grow its payout won't blow anyone's socks off -- management anticipates a 5% increase in 2019 -- but that's because it intends to spend $1.25 billion to complete construction of its current projects. In 2019 alone, it expects to spend $1.1 billion, which is 40% more than it has spent in any year prior. For now, management is electing to plow more into growth today for higher distribution growth down the road. For investors looking for a high-yield stock they can hold for a long time, Magellan should be high on the list.
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John Bromels owns shares of Kinder Morgan. Rich Smith has no position in any of the stocks mentioned. Tyler Crowe owns shares of Enterprise Products Partners, ExxonMobil, Magellan Midstream Partners, and MPLX LP. The Motley Fool owns shares of and recommends Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners, Magellan Midstream Partners, and ONEOK. The Motley Fool has a disclosure policy.