These energy stocks will warm your pocket.
The energy sector started off the year with momentum, accelerating its multi-year turnaround as the OPEC production cuts, in place through the end of 2018, continue to suppress the supply glut that's plagued oil prices since their steep descent began in 2014. Importantly, U.S. shale production may reach a bottleneck due to labor and materials shortages. All things considered, a handful of stocks are poised to outperform, ranging from mainstream oil majors to small-cap diamonds in the rough yielding as much as 9 percent a year. After another tough year for the sector in 2017, here are seven of the best energy stocks to buy for 2018 as the sector's profits normalize.
Updated on April 27, 2018: This story was originally published on Dec. 4, 2017, and was updated to include new information.
Royal Dutch Shell PLC (NYSE:RDS.A)
Royal Dutch Shell, one of the world's largest integrated oil and natural gas companies, is a solid pick for energy investors seeking an established name with low volatility. The $290 billion Netherlands-based giant is also a great dividend stock, boasting a 5.4 percent yield. RDS, which managed to keep pace with the Standard & Poor's 500 index in 2017 while U.S. rivals like Exxon Mobil Corp. (XOM) underperformed it by about 25 percent, is showing renewed confidence in its business. In November, it resumed paying its dividend in cash -- it had used fractional shares for the previous two-and-a-half years -- and announced a stock buyback program.
BP PLC (BP)
This integrated oil major is on the up-and-up after initially struggling to adjust to the bear market, and while it's not a particularly exciting pick, it's one of the best energy stocks to buy for 2018 for much the same reason as Royal Dutch Shell: a ravenously enticing 5.4 percent dividend, lower risk than smaller players and lean operations that allow it to profit even if oil retreats to $49 or $50 a barrel. BP, which lost more than $4.2 billion in 2015, has posted six straight quarters of profits and is expected to grow earnings by 52 percent in 2018.
Oasis Midstream Partners LP (OMP)
Despite an IPO in September 2017 that attracted little attention, Oasis Midstream Partners -- a master limited partnership (MLP) that has 15-year contracts for its midstream services in the Williston Basin -- is a potential dividend all-star. Required distributions amount to $1.50 a year per unit (share), and OMP targets 20 percent distribution growth annually. In its first quarter as a public company, revenue jumped 62 percent and net income rocketed 71 percent higher. If OMP increases its distribution 20 percent to $1.80 per share, and assuming OMP yields 7.5 percent, shares would hit $24 by year's end, representing more than 30 percent upside.
Tallgrass Energy Partners LP (TEP)
Another of the semi-obscure picks among the best energy stocks to buy for 2018 is Tallgrass Energy Partners, an MLP with pipelines and midstream operations in the western U.S. It could be considered a contrarian pick -- shares underperformed the market in 2017 -- but it's both cheaply valued (trading at a price-earnings ratio of 11) and extremely tax efficient. MLPs aren't subject to corporate taxes, which means no double taxation. They also distribute a vast majority of earnings to unit holders in quarterly distributions, which are treated as return of capital instead of income. As for TEP's juicy 9.1 percent dividend? It speaks for itself.
Valero Energy Corp. (VLO)
Further diversifying the list of 2018's best energy stocks to buy is Valero, a Texas-based petroleum and ethanol refiner and marketer. While OMP and TEP are each mostly midstream plays that extract tolls for transporting and storing oil and gas products, VLO specializes in downstream operations, such as refining, marketing and distribution. Unlike explorers, drillers and producers, refiners can thrive when oil prices are low or falling. VLO managed to soar in 2017, a year when crude prices were down by as much as 20 percent. A modest forward P/E of 13 and a 3 percent dividend make Valero a good portfolio hedge if oil's recent rally doesn't last.
Halliburton Co. (HAL)
Halliburton shareholders would prefer that oil prices continue rising in 2018; the oilfield services giant contracts with explorers, frackers and producers to help them locate, manage, drill and extract natural resources more efficiently. When prices rise, drillers come out of the woodwork, and Halliburton cashes in. HAL further diversifies 2018's best energy stocks list and can also be considered a play on the potential resurgence of fracking. Regardless, if oil prices stay in the $60s or even mid-to-upper $50s, HAL -- which saw revenue grow 30 percent and nearly swung to a profit in 2017 after losing $5.76 billion the year before -- should perform well.
Exxon Mobil Corp. (XOM)
Rounding out 2018's list is another multinational oil major, built for the long term and designed to profit in any environment. While 2017 wasn't the best year for Exxon -- the stock was one of the worst performers in the Dow -- if the "Dogs of the Dow" theory holds, 2018 should be a good year. Analysts are expecting EPS to be 150 percent higher in 2018 than in 2016. At $340 billion, XOM likely won't be the biggest winner on this list in 2018, but it's a solid portfolio anchor that every conservative energy investor should own in some form. Thirty-five years of dividend growth is also tough to find.
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