For all the ups and downs of the oil industry over the past few years, there are signs that things are getting better for companies in this space. Sure, oil prices are all over the place, but capital spending is up and there are clear needs for new sources and infrastructure to move those new sources to market. So we asked three of our Motley Fool contributors to each highlight an oil stock they view as good buys now. Here's why they picked Enterprise Products Partners (NYSE: EPD), ExxonMobil (NYSE: XOM), and ConocoPhillips (NYSE: COP).
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This infrastructure stock is building pipelines and momentum
Tyler Crowe (Enterprise Products Partners): Back in 2017, Enterprise Products Partners management knew that it was on the precipice of a huge boom in pipeline and processing facilities construction. In order to finance this construction wave and to assuage investor concerns about issuing equity to pay for things, management elected to grow its payout at just about the slowest rate you can: a penny a year. The thought was that, by keeping payout growth low, it would be able to retain more cash over time to fund growth.
This past quarter was a shining example of why this was the right move. The oil and gas midstream company reported that its distributable cash flow was up 18% compared with this time last year and that it retained about $665 million to fund its capital spending for the year. Cash flow growth for a company of Enterprise's size is almost unheard of, and its ability to retain that much cash for growth is creating a virtuous cycle where it can now invest in even more ambitious pipeline and other infrastructure projects.
Enterprise has long been known for its conservative management, with a reputation of being good stewards of shareholder capital. Now it's proving that it can grow and meet the ever-increasing demands of the American oil and gas industry. For investors looking for a long-term stock in energy, Enterprise Products Partners is hard to beat.
Oil is expensive, but this oil giant's stock is still cheap
Across the country and around the globe, oil prices are surging, with WTI crude prices approaching $66 a barrel and Brent crude already north of $74. Earlier this week, CNBC pointed to a move by the Trump administration to cease granting waivers on sanctions against countries importing Iranian oil, a move that -- in CNBC's estimation -- could cause importers to recoil from Iranian production, and remove as much as a million barrels a day of production from the market.
By constricting supply but doing nothing to depress demand, such a move would almost certainly send prices even higher. And as one of the world's biggest (non-Iranian) oil producers, ExxonMobil would almost certainly benefit.
Not that Exxon needs the help. ExxonMobil stock has already gained a rollicking 27% since oil prices bottomed on Christmas Day. At the same time, I can't help but notice that Exxon's stock valuation of only 17 times trailing earnings remains a good five points below the average 22 P/E on the S&P 500, while Exxon's dividend yield, at 4.1%, is nearly twice the market average.
With numbers like these, even if oil prices don't go any higher, ExxonMobil looks like a great oil stock to buy right now.
Bigger can be better
John Bromels (ConocoPhillips): When oil prices are falling, owning shares in an oil exploration and production company is no fun. But when prices are on the rise, as they are right now, owning a so-called E&P ought to be a picnic. But strangely, that's not what's happening right now for investors of the largest domestic E&P, ConocoPhillips.
So far this year, Conoco has seen its shares rise only a wimpy 1.2%. That's far below most of its E&P peers, nearly all of which are sitting on double-digit returns for the year to date. And it's not due to poor performance, either. Conoco's recently reported Q1 2019 was an earnings bonanza, with adjusted earnings of $1.1 billion, up 106.4% over the prior-year quarter. Production is up, cash on hand is way up, and the company continues to buy back shares.
The reason the stock market may be yawning about Conoco's recent performance is that over the long term, it's actually been outperforming its peers. Conoco's stock is only down 15.5% over the last five years, which measures from just before the big oil price slump of 2014-2017. Many other E&P stocks are down 50% (or more) during that time frame. But even so, Conoco's PE ratio of 11.8 is still middle of the pack, while its enterprise-value-to-EBITDA ratio -- another common valuation metric -- is a very low 4.7.
But as the biggest dog in the pack, ConocoPhillips has some advantages, as its recent performance shows. Its sheer size makes it one of the best-positioned companies to capitalize on the current upward trend in oil prices. And that, plus a reasonable valuation, makes it a good choice to consider right now.
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John Bromels has no position in any of the stocks mentioned. Rich Smith has no position in any of the stocks mentioned. Tyler Crowe owns shares of Enterprise Products Partners and ExxonMobil. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.