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3 Top Oil Stocks to Buy in May

John Bromels, Rich Smith, and Tyler Crowe, The Motley Fool

Think it's costing you more to fill up your tank these days? You're not wrong. So far in 2019, oil prices have risen more than 30%. And the summer driving season, when demand is highest, hasn't even started yet. 

With that in mind, we asked three of our Motley Fool contributors for their top stock picks in the oil industry this month. They came back with Apache Corporation (NYSE: APA)Chevron (NYSE: CVX), and MPLX (NYSE: MPLX). Here's why they like these stocks right now. 

Oil pours from a golden barrel

With energy prices on the rise, these oil industry stocks may follow suit. Image source: Getty Images.

Beaten down...again

John Bromels (Apache Corporation): Sometimes I worry that the market is just never going to reward Apache. Since the company announced its major Alpine High find in the Permian Basin back in 2016, the market has sent shares lower and lower.

First, it was because Apache's production numbers were declining as it sold off noncore assets and worked to ramp up production at Alpine High. Then the Alpine High buildout was delayed by Hurricane Harvey, and the market fretted that the company would miss out on high energy prices. Now, with production rising, the market is concerned that all that Permian Basin production has nowhere to go, because of transportation issues out of the Permian. 

Those fears were exacerbated in late April, when the company announced it was temporarily deferring some natural gas production at Alpine High thanks to low gas prices at the nearby Waha hub. And by "low," I mean negative. That's right: There's so much excess natural gas production capacity in the Permian right now and so few pipelines to take it away that "sellers" have literally been paying "buyers" to take their excess gas away. 

That doesn't sound good for Apache, but the company may actually be better positioned than other Permian producers to start clawing out of this mess. For one thing, Apache's joint venture Altus Midstream is partnering with Kinder Morgan on the Gulf Coast Express pipeline, which is expected to be completed in October 2019. It will not only provide Apache with an outlet for 550 million cubic feet per day of its Permian natural gas, but it will allow the company to profit off of the gas other producers ship through the pipeline. 

At this price, it may be an excellent time to snap up shares.

Do not pass "go." Do not collect $200: Collect $1 billion instead

Rich Smith (Chevron): Chevron may not be the cheapest oil stock on the planet. But at a valuation of less than 17 times trailing earnings -- and only 13.5 times its robust free cash flow -- I'm still of the opinion that Chevron could be worth putting on your short list.

Why?

Despite experiencing the predicted decline in GAAP profits on lower oil prices and a weak refining market, Chevron's real cash profits -- its free cash flow (FCF) -- held up just fine last quarter. (Indeed, operating cash flow actually increased slightly, while capital spending declined!) As a result, Chevron held on to the valuation that convinced me to recommend it in the first place. Meanwhile, analyst predictions of strong growth in FCF in future years -- as much as $32.6 billion by 2023 -- remain intact.

On top of all this, Chevron recently made the bold decision to walk away from Anadarko and allow its rival Occidental Petroleum to buy the company. In so doing, Chevron not only rescued its shareholders from the risk of overpaying for a new subsidiary, but it actually picked up a $1 billion "breakup fee" on its way out. That's essentially free money that should drop straight to the bottom line (which should make Chevron stock look even cheaper).

Result: As of this month, Chevron has (1) made its shareholders $1 billion richer, and (2) demonstrated the kind of fiscal prudence that points to the possibility of Chevron shareholders becoming even richer in years to come. I'd say that justifies a buy rating.

MPLX's deal looks like the right move

Tyler Crowe (MPLX): It didn't take a stock market sage to foresee that MPLX would eventually acquire Andeavor Logistics (NYSE: ANDX). When MPLX's parent company, Marathon Petroleum (NYSE: MPC), acquired Andeavor Logistics' parent organization, Marathon owned two publicly listed master limited partnerships that provided similar, if not overlapping, services. Keeping them as separate entities made little to no sense, so management made the choice to combine the two in a $9 billion deal.

Full disclosure: I'm a shareholder of MPLX, and I was apprehensive of a potential deal. Combining the two would certainly offer more investment opportunities, and the parent organization wouldn't be troubled with trying to allocate capital and projects to similar subsidiaries. My concern with the merger was that Andeavor Logistics wasn't in as solid financial shape and MPLX would end up paying too high a premium. After seeing the terms of the deal, though, I think it's fair to say that management made the right call.

The deal, as structured, priced Andeavor Logistics at a 1% premium. Even though Andeavor investors received a 7% premium to the price at the time of the announcement, Marathon sold its stake to MPLX at a market discount. Also, even though the deal is an all-equity offer, it will improve the company's distributable cash flow such that its distribution coverage ratio -- at an already healthy level of 1.4 -- should only get better.

Even though MPLX has set itself up incredibly well to grow its payout to investors at a high rate over the next several years, shares of the MLP still have a distribution yield of 8.1%. For a business with loads of growth in the wings that has shown to be a good steward of shareholder capital, this looks like a great buy opportunity.

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John Bromels owns shares of Apache and Kinder Morgan. Rich Smith has no position in any of the stocks mentioned. Tyler Crowe owns shares of MPLX LP. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.