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3 Top Oil Stocks to Buy Right Now

Tyler Crowe, Matthew DiLallo, and Reuben Gregg Brewer, The Motley Fool

The oil and gas market has been a tough nut to crack over the past few years. After the incredible collapse in oil prices from 2014 to early 2016, the industry has been slowly creeping back at a pace that many investors have ignored. There's no doubt that today's oil prices in the $50- to $60-per-barrel range isn't anywhere near the $100 or more we saw a few years ago, but the companies producing the stuff have made incredible strides to become profitable at these much lower prices. 

As a result, there are some rather attractive-looking investments in the oil and gas industry today. So we asked three of our investing contributors to each highlight an oil investment they see as a great buy now. Here's why they picked Marathon Oil (NYSE: MRO), U.S. Silica Holdings (NYSE: SLCA), and ExxonMobil (NYSE: XOM).

offshore oil rig at sunset.

Image source: Getty Images.

Set up for a big score

Matt DiLallo (Marathon Oil): During the oil market downturn, Marathon Oil put together a simple playbook so it could start winning again at lower oil prices. The first few plays consisted mostly of blocking and tackling, such as strengthening its balance sheet, relentlessly focusing on costs, and simplifying and concentrating its portfolio. The company felt that if it could do those things well, then it could profitably grow within cash flows at lower oil prices, which would enable it to score gains for investors.

Marathon has completed most of its more defensive-focused moves by selling higher-cost assets and using that cash to shore up its finances as well as bulk up its shale position. As a result, it can now generate enough cash flow at $50 oil to grow production by a 10% to 12% compound annual growth rate through 2021. Further, it can achieve that double-digit growth while also paying its current dividend.

That ability to deliver healthy production growth within cash flow at $50 oil puts Marathon in an elite group. It's one of the few oil companies that can still create value for investors even if oil prices slip a bit while retaining uncapped upside if they continue recovering. That combination of a lower risk profile and high reward potential makes it an exceptional oil stock to consider buying, since it could still run up a big score for investors even if crude doesn't recover any further.

Lots of growth coming in 2018

Tyler Crowe (U.S. Silica Holdings): The frack sand market has been extremely volatile over the past few years. Back in 2014, it looked as if the industry could do no wrong, and then it became one of the hardest hit industries as the price of oil crashed and drilling activity in North America came to a grinding halt. Over the past year, though, the industry has picked back up in a big way. Just about every major frack sand supplier is running at full capacity and is in the process of expanding operations with new mines. 

There does appear to be some skepticism from Wall Street that all these new mines are needed. All this additional capacity could lead to another oversupply that kills margin. While that is a valid opinion, it may help boost the argument for U.S. Silica in the coming years.

U.S. Silica has the most ambitious growth plans of its frack sand peers. Between acquisitions and greenfield projects, the company has either completed or is constructing facilities to expand production by 9 million tons per year, or a 70% increase from its production capacity from a year ago. Adding that much capacity sounds risky, but management is de-risking some of these projects by signing up customers to long-term takeaway contracts that ensure a high level of demand. According to management, the company has already secured takeaway contracts for 1.2 million tons of its recently announced 2.6 million ton-per-year facility near Midland, Texas, that also includes cash pre-payments to help fund the mine. Moves like this suggest the company's growth plans aren't as risky as they sound.

If we assume that last quarter's results can be replicated in the coming quarters -- it seems reasonable as it expands capacity and grows margin through its logistics business -- then perhaps today's price-to-earnings ratio of 42 might not reflect the value in U.S. Silica's shares. 

MRO Chart

MRO data by YCharts

Cheap, in a historical context

Reuben Gregg Brewer (ExxonMobil Corporation): Exxon is one of the world's largest integrated oil majors. It has historically traded at a premium to its peers, which it continues to do today. Only BP plc's (NYSE: BP) price to tangible book value is anywhere near Exxon's. But the other oil majors have been closing the gap. This is an interesting dynamic.

In fact, Exxon's price to tangible book value sits near a 10-year low. That suggests that, relative to its own history, Exxon is cheap. Most of its peers appear either fairly valued (trading around the midpoint of their historical range) or even expensive (BP's ratio has moved notably higher this year) on this metric after stock price advances that have, basically, left Exxon behind. Exxon is down around 8% so far this year, while Royal Dutch Shell (NYSE: RDS-B) tops the advancers at a roughly 13% gain.   

However, Exxon continues to be a top performer when it comes to putting shareholder money to work, as measured by return on capital employed. Recovering oil prices have led to improvement at all of the majors on this metric, but only ENI (NYSE: E) has excelled to the point where its returns are notably higher than Exxon's. Exxon continues to perform well as a business.   

In short, Exxon looks cheap on a relative basis compared to its history despite an improving industry outlook that's lifted the market's view of its peers. If you're looking for a good value in big oil, Exxon may be the right choice for you.

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Matthew DiLallo has no position in any of the stocks mentioned. Reuben Gregg Brewer owns shares of ExxonMobil. Tyler Crowe owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.