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3 Oil Stocks to Buy for 2018

By John Bromels - Feb 2, 2018 at 7:04AM

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These three oil and gas industry players are great bets to outperform this year.

"Well, we're movin' on up!" That famous refrain from The Jeffersons could be referring to the spot price of oil -- now firmly above $60 per barrel -- or oil industry stocks, which have been on a tear in recent months. But with some oil stocks up by double digits already this year, oil and gas investors may be wary about putting their money into this industry in case the trend reverses.

Here are three oil stocks that look promising for investors in 2018: Apache Corporation (APA 3.49%)Royal Dutch Shell (RDS.A) (RDS.B), and Magellan Midstream Partners (MMP 0.12%)

Oil pours from a gold barrel

Since 2014, the oil and gas industry has been rough on its investors. But now may finally be the time to buy. Image source: Getty Images.

Already moving up

Shares of independent oil and gas exploration and production companies have already begun to rise as the price of oil has improved. Some have already seen large gains, but others are still in the early stages of recovery, like Houston-based Apache Corporation.

Apache turned a profit in its third quarter of 2017, even with WTI crude below $50 per barrel for most of the quarter and Hurricane Harvey-related delays temporarily impacting production. So, naturally, with WTI crude now above $60 per barrel, the company's performance should improve even more.

But that's not the only reason to expect big things from Apache this year. Production at Apache's new Alpine High play in West Texas -- a monster oil and gas find that the company acquired for a song -- should finally begin in earnest this quarter, so the one-two punch of higher production plus better margins ought to pay off for Apache's investors. Not to mention, the company sports a best-in-class dividend yield among independent drillers of 2.1%.

Up until now, maintenance issues in the company's North Sea operations and Hurricane Harvey have conspired to keep a lid on Apache's production, so the company's Q4 2017 earnings release in February may seem less than stellar. But if Apache can deliver on its promises, which it has a solid track record of doing, 2018 is poised to be a breakout year for the oil and gas driller.

A major attraction

Rising oil prices are also improving the fortunes of the integrated oil majors, and Royal Dutch Shell is a top pick among them. My Foolish colleague Tyler Crowe even goes so far as to call it the best big oil stock for 2018. And he's got a point. Shell's stellar dividend yield and solid fundamentals offer an appealing combination of income and growth potential.

Like all the oil majors, Shell has been cutting costs, allowing it to turn in a fantastic third quarter of 2017, during which Brent crude prices averaged about $52 per barrel. Profits were up 47% year over year, to $4.1 billion.

Meanwhile, the company's outlook is also upbeat. Shell has been divesting underperforming assets, with the goal of dropping some $30 billion in assets by the end of the year. It's also expanded its liquefied natural gas business, a market it expects will grow even faster than oil in coming years. That should help keep investors' money safe even if the oil market softens again. 

Last, but certainly not least, Shell's current dividend yield of 5.2% is among the best in the industry. 

Boring is good

The boring world of energy infrastructure might not be a place you'd go looking for a hot stock, but investors in pipeline operator Magellan Midstream Partners doubled their money between 2010 and 2012...and again between 2012 and 2014. And that's not even counting the company's generous dividend. True, shares peaked in 2014, but that's the case pretty much across the industry. 

And good news for investors buying in now: Magellan's shares haven't gone up nearly as much in the past three months as Apache's or Shell's. That's because Magellan charges oil and gas producers to move their products through its 9,700 miles of pipelines, so it keeps making money regardless of how expensive or cheap oil and gas are. So its shares didn't tumble as far as Apache's or Shell's during the downturn.

But that doesn't mean the company isn't growing. Magellan has a long history of growth through acquisition. And with domestic oil and gas production projected to take off in 2018 thanks to higher energy prices, Magellan can start commanding a higher price in turn thanks to increased demand. Adding to the short-term thesis for the company, Magellan also has more than $1 billion of high-return expansion projects in the works, all of which should come online within the next two years.

Investors should be aware, though, that Magellan and its 4.8% dividend yield have one big drawback for individual investors. Because of the company's status as a master limited partnership, there are special tax reporting requirements for investors. Be sure you're aware of what that will mean for you before you buy in.

Investor takeaway

With oil prices now significantly above the $50 per barrel "breakeven point" for many companies, there are opportunities throughout the sector for stellar returns in 2018 and beyond. Companies like Apache, Shell, and Magellan seem poised to benefit from this continuing trend.

However, investors should be aware that there's no guarantee that oil prices will stay above $60 per barrel all year. Depending on energy policies from major players like the U.S., Russia, and OPEC; possible fluctuations in demand; or unforeseen geopolitical events; oil prices could drop back under $60 per barrel...or even $50 per barrel. However, it's more likely that oil prices will stabilize and make 2018 a great year for oil and gas investments like Apache, Shell, and Magellan.

John Bromels owns shares of Apache. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.A
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.B
Apache Corporation Stock Quote
Apache Corporation
APA
$31.75 (3.49%) $1.07
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
MMP
$49.94 (0.12%) $0.06

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

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