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3 Oil Stocks to Buy in September

By Jason Hall, Dan Caplinger, and Tyler Crowe – Sep 13, 2016 at 9:22AM

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These three oil stocks are set to be great long-term investments. Our contributors tell you why you should consider buying them now.

Ready to invest in an oil stock? Here are three timely ideas from our experts. Image source: Getty Images.

The oil industry continues to struggle, with oil prices still down nearly 60% from 2014's peak. But don't throw the baby out with the bathwater -- there are a lot of great companies operating in the sector that remain worthy investments. With that in mind, we asked some of our top contributors to offer up timely ideas that investors should consider. If you're looking for an oil stock to buy right now, one of their picks might be exactly what your portfolio needs. 

Making a big find

Dan Caplinger: During crude oil's plunge in 2015, most energy companies fell almost in lockstep, and that made many investors erroneously think that all energy companies are the same. But there are still winners and losers in the exploration and production game, and Apache (APA -3.17%) proved that recently when it made a huge discovery that should have long-term ramifications for the producer well into the future.

Apache said that its Alpine High acreage, located in a remote area in West Texas, had proven out to be what it understatedly termed "a significant new resource play." After having spent years buying up acreage in the area, performing extensive research into the geology and geophysical aspects of the land, and looking for ways to optimize the development of the tract, Apache said that it now estimates 3 billion barrels of oil in place on the tract, as well as 75 trillion cubic feet of natural gas. Moreover, in addition to those finds in relatively deep rock formations, Apache believes that even more oil could be present in shallower layers.

Shares have already climbed on the news, but the economics point to a dramatic boom for Apache even without considering the potential impact of future oil price increases. By bucking the trend and investing in its own assets, Apache scored a major win and should see benefits for years to come.

Underestimating stable growth

Tyler Crowe: One company that continues to look like a solid investment in the oil and gas industry is Magellan Midstream Partners (MMP -0.52%). Magellan is unlike many other pipeline and logistic companies in this industry, because a vast majority of its network is dedicated to moving refined petroleum product rather than raw products such as crude oil and natural gas. Refined products such as gasoline and diesel typically have more consistent demand and are less subject to the ups and downs in volumes you might see with other products. To add to that advantage, the revenue Magellan receives from these pipelines comes mostly -- about 80% -- from fixed fees, so this ensures a pretty consistent cash flow quarter in and quarter out to pay its shareholders a handsome distribution.

One thing that investors seem to be discounting about Magellan's future is that it has a couple of major projects in the wings that will significantly improve results in the coming years. Today, it has more than $600 million in new projects that are slated to come on line by the end of 2016, and it has just started on its big project, a multiphase development of a marine storage and export terminal in the Houston ship channel that is expected to cost about $1 billion. These major projects are expected to lead to sizable distribution growth over the next couple of years, and that doesn't include the upside potential of an acquisition that Magellan has said it's exploring.

These things all suggest that there is quite a bit of growth for Magellan in the coming years, but the market hasn't exactly been kind to this stock over the past couple of years. So this may be the time to jump into Magellan, while its stock has a distribution yield of 4.6%.

High-quality company to buy on a dip

Jason Hall: As of this writing, Phillips 66 (PSX -2.67%) shares are down about 17% from their late 2015 peak. And not completely undeservedly so, since the company has seen its profits get squeezed in recent quarters, as falling crude oil prices put a pinch on the crack spread the company had been getting on its refined products. 

But it's not a company in decline or in trouble, and just as with Magellan Midstream, Phillips 66 has a lot of growth potential ahead of it. The company has several major petrochemical, export, and oil and gas infrastructure projects on track to start contributing big profits in 2017 and beyond.

Furthermore, the recent decline in Phillips 66 shares has pushed its effective dividend yield over 3%, and management is committed to increasing the dividend along with earnings growth in years ahead. Add a strong share buyback program into the mix, and Phillips 66 is a high-quality oil stock, well worth buying at these prices and holding for the long term. 

Dan Caplinger has no position in any stocks mentioned. Jason Hall owns shares of Phillips 66. Tyler Crowe owns shares of Magellan Midstream Partners. The Motley Fool recommends Magellan Midstream Partners. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Phillips 66 Stock Quote
Phillips 66
$107.82 (-2.67%) $-2.96
Apache Stock Quote
$44.96 (-3.17%) $-1.47
Magellan Midstream Partners Stock Quote
Magellan Midstream Partners
$51.59 (-0.52%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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