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3 Top Energy Stocks to Buy in February

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These energy stocks have shareholder-focused plans that could pay big dividends for investors in the months ahead.

After sprinting out of the gates along with the price of oil to start the year, energy stocks gave back their gains and then some when the market took a nasty tumble earlier this month. That leaves investors with the opportunity to buy some strong energy companies at much better prices. Three that caught our attention are TerraForm Power (TERP), Marathon Petroleum (MPC 2.64%), and Royal Dutch Shell (RDS.A)(RDS.B). With this trio all down double digits from their most recent highs, we think that makes them excellent energy stocks to buy this month. Here's what our Foolish investors had to say. 

The plan is working even better than expected

Matt DiLallo (TerraForm Power): Last fall, renowned value creator Brookfield Asset Managment took control of wind and solar power generating company TerraForm Power. It did so with a plan to focus on growing shareholder value instead of just increasing the size of the company. The companies have already instituted several changes that should drive down costs and improve returns, and they've worked hard to get TerraForm's balance sheet back on solid ground.

An oil pump with stacks of $100 bills in the back ground.

Image source: Getty Images.

TerraForm expected to reinstate a high-yielding dividend this year, with initial plans to pay out $0.72 per share in 2018. However, because the company had made such good progress already on its turnaround strategy, it was able to swoop in and strike a deal to buy some more wind and solar assets at a fantastic price. As a result, it now plans on paying out $0.76 per share in dividends this year. That deal makes it even more likely that the company can meet its goal of increasing its payout at a 5% to 8% annual clip for the next several years.

But despite exceeding the expectations of its strategy so far, shares of TerraForm are down more than 20% over the past few months, including slumping 7% already this year. That makes it an incredible bargain right now for long-term investors, which is why I think it's a top energy stock to buy this month. 

A shareholder-friendly business plan you can believe in

Tyler Crowe (Marathon Petroleum): On the surface, oil refining doesn't look to be the most attractive business to be in right now. Since changes to refined petroleum products tend to lag behind crude oil prices, a refiner's margin tends to take it on the chin when oil prices rise. With crude oil prices continuing a steady trend upward, it would make sense to avoid Marathon and other refiners.

The nice thing is that Marathon's business is diversified enough that it doesn't have to wholly rely on refining and marketing to make its hay. The company's investments in its Speedway retail convenience stores and its ownership of master limited partnership MPLX provide close to $500 million in operating income each quarter, and the company expects these non-refining earnings to increase significantly as the bulk of its capital spending is going into these business segments.

With a steady source of operating income and cash flow in a relatively low-growth industry, Marathon throws off boatloads of free cash flow that it returns to shareholders with a generous dividend -- which currently yields 2.85% -- and a monstrous share repurchase program that has reduced share count by 31% since it went public in 2011.

MPC Average Diluted Shares Outstanding (Quarterly) Chart

MPC Average Diluted Shares Outstanding (Quarterly) data by YCharts

With a relatively modest balance sheet, plenty of cash generation from its three business segments, and the added benefit of fewer cash tax payments from here on out, Marathon is looking like a wealth-building stock worth considering today. 

Go big or go home

John Bromels (Royal Dutch Shell): When the market takes a nosedive, it's a great time to go shopping for companies whose valuations have tumbled. And that's why oil giant Royal Dutch Shell is a great pick for February. Shares that had surpassed $73 can now be had for less than $66, which is like buying the stock back in November, when Brent crude had just surpassed the $60-per-barrel mark. 

But with per-barrel Brent prices now in the high $60s, Shell's short-term outlook is fantastic. That prognosis is highlighted by the company's recent stellar 2017 earnings report, in which net income soared 184% year over year, even as expenses fell by 8%. And considering that Shell is a Dutch -- not an American -- multinational, it's less likely than U.S. firms to be affected by the potential changes in U.S. monetary policy that have the market so spooked right now. 

Instead, thanks also to the recent market slump, the company's dividend yield is up -- to a nearly best-in-class 5.7%. That, combined with Shell's solid fundamentals and its eye for the future, offers an excellent combination of security and income for a February stock buy.

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Stocks Mentioned

Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.A
Marathon Petroleum Corporation Stock Quote
Marathon Petroleum Corporation
MPC
$87.94 (2.64%) $2.26
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.B
Brookfield Asset Management Inc. Stock Quote
Brookfield Asset Management Inc.
BAM
$45.73 (0.17%) $0.08
MPLX LP Stock Quote
MPLX LP
MPLX
$29.00 (0.48%) $0.14
TerraForm Power Stock Quote
TerraForm Power
TERP

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

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