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3 Top Oil Stocks to Buy in October

Reuben Gregg Brewer, John Bromels, and Matthew DiLallo, The Motley Fool

Oil prices have bounced around a lot this year, which is par for the course. But black gold has been heading generally higher for the last 12 months. That's led investors to take a more positive view of some companies, including Apache Corporation (NYSE: APA)  and ExxonMobil Corporation (NYSE: XOM). However, both still appear to offer investors a good buying opportunity. Meanwhile, Newfield Exploration Company (NYSE: NFX) looks like it's being left behind, which should interest value investors searching for deals. Here's a quick look at this trio of top oil stocks worth buying in October.

An insanely cheap oil stock

Matt DiLallo (Newfield Exploration Company): While oil prices have been red-hot, some oil stocks haven't participated in the industrywide rally. One of the biggest underperformers is Newfield Exploration, which has lost 11% of its value this year even though the price of crude in the U.S. has gained another 25%. That underperformance is one reason why Newfield sells at a bottom-of-the-barrel valuation of just 4.6 times cash flow, which is half the level of most peers.

A man in an orange hard hat standing in front of an oil well while writing on a notebook

Image source: Getty Images.

That discount doesn't make any sense because Newfield is right up there with its rivals when it comes to its balance sheet strength and growth prospects. On the financial side, the company's leverage ratio was 1.7 times at the end of the second quarter, which was ahead of its 2018 guidance of 1.8 times due to higher oil prices. Furthermore, it's well within the less than 2.0 times comfort zone of its peer group. The company is on pace to grow its production 18% to 25% this year, which is on par with its fast-growing peers. Even better, the company is delivering that high-octane growth rate while producing excess cash.

Typically, a fast-growing oil stock with a strong balance sheet would sell for a premium valuation. However, with Newfield trading at a huge discount, it suggests the company's stock could have significant upside as its valuation moves closer to the peer group average. While it might take a catalyst such as a needle-moving stock buyback to spark that move, Newfield has a growing cash pile that it could use to jump-start its shares, which is what makes it such a compelling oil stock to consider buying this month.

Finally taking notice

John Bromels (Apache Corporation): Shares of oil and gas driller Apache Corporation recently hit a one-year high, surpassing the $49-per-share mark. The beaten-down driller may be finally seeing some love from the stock market.  

Apache has seen its stock bid up twice already this year, only to see the gain ultimately disappoint. After surpassing $48 a share in early February, the market downturn hit and took Apache's stock price with it. Then, in July, shares reached $48.50, just to have a brief downturn in crude oil prices suck them back down to $42 a share. 

But there are reasons to think that things may be different this time. WTI Crude prices, which primarily govern Apache's oil holdings in the West Texas Permian Basin, have been trending generally higher all year, recently peaking north of $75 per barrel (though they have since come back down a little). In the meantime, Apache's oil and gas production are continually increasing -- the company recently upped its 2018 guidance from a midpoint of 254,000 barrels of oil equivalents per day (BOE/d) to 260,000 BOE/d. And those production gains should keep on coming: Management projects that Apache's Permian operations will be generating at least 315,000 BOE/d by 2020, about double the 158,000 BOE/d they produced in 2017. 

It's good to see the market finally bidding the stock up to reasonable levels, especially since it's lagged so far behind its peers this year. But solid oil prices and continued productions gains suggest Apache's shares still have plenty of room to run, making the company a top stock for October. 

There's still time to jump aboard

Reuben Gregg Brewer (ExxonMobil Corporation): Exxon shares haven't performed particularly well over the year-to-date span, hovering near the low end of its peer group. However, over the past six months, the integrated energy giant has handily outdistanced the pack, up 15% compared to the next closest competitor's advance of 8.8%. And despite the performance upturn, Exxon's dividend yield, at around 3.8%, is still the highest it has been since the late 1990s. Its price to tangible book value also remains at levels last witnessed in that same decade.

XOM Dividend Yield (TTM) Chart

XOM Dividend Yield (TTM) data by YCharts.

Although the stock's recent upturn is nice to see, it still looks historically cheap. In fact, there remains a lot of work to be done at Exxon. The company's long-term earnings goals, for example, are geared to 2025, when it expects to double earnings per share if oil prices are in the $60-per-barrel range. If they are around the $80-per-barrel level, Exxon expects earnings to increase by as much as 225%. Those projections are built on big capital spending plans across its entire business (as much as $30 billion a year between 2020 and 2024), including in the oil giant's upstream drilling operations and its downstream chemicals and refining businesses.   

Clearly, investors have taken a more positive view of Exxon's future lately, even though 2025 remains a long way off. But these are still early days in the company's efforts to turn the ship. That means that, despite the recent advance, long-term investors should still feel comfortable jumping aboard.

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