If you're looking at investing in the oil patch, don't limit yourself to just oil-extracting companies; think more broadly so you can benefit from every possible opportunity. For example, drilling services company Ensco plc (NYSE:ESV) is trading at a deep discount despite strong contracting activity. Pipeline owner Enbridge Inc. (NYSE:ENB) is starting to turn the corner after a transition year in 2017. And ExxonMobil Corp. (NYSE:XOM), the only true oil company here, is lagging its peers, but perhaps not for long. Here's why three of our Foolish investors see these as potentially the top oil stocks to buy right now.
Pennies on the dollar
Jason Hall (Ensco): Since the oil downturn began in 2014, oil companies have shied away from expensive, long-to-develop offshore projects, preferring to invest in quick-turnaround shale projects that require far less initial investment, even if they aren't as profitable on a per-barrel basis and require constant drilling to maintain production levels. But at some point, those offshore resources are going to play a vital role in meeting global energy needs. Offshore projects may be complex and take longer to develop, but they're also very cheap sources once the oil and gas starts flowing.
And Ensco is an excellent company to own for that eventuality. It just completed its acquisition of Atwood Oceanics, further strengthening its fleet, and finished 2017 having signed about 15% of the new rigs years awarded by producers for the full year -- twice as much market share as anyone else. Ensco also strengthened its balance sheet recently, issuing $1 billion in long-term notes to pay off all debt due through the first half of 2020, while adding $300 million to its balance sheet. The company has $1.2 billion in cash on hand and $2.8 billion in contracted work on its backlog.
At recent prices, Ensco trades for less than 25% of its book value, compared to above 1 time above book historically. Offshore investment is slowly starting to improve. Ensco should be a huge winning investment as that plays out.
A high-yield bargain
Matt DiLallo (Enbridge): Canadian oil pipeline company Enbridge has shed nearly a quarter of its value in the past year, which is hard to justify. While the company did report a 10% decline in distributable cash flow (DCF) per share in 2017, the absolute number surged 50%. Driving the difference is that the company issued a boatload of new stock to finance its expansion initiatives, which weighed on the per-share number last year.
That trend, however, should reverse in 2018, with the company anticipating a 15% increase in DCF per share, fueled by the 12 billion Canadian dollars' ($9.6 billion) worth of expansion projects it finished last year. Meanwhile, with another CA$22 billion ($16.8 billion) of expansion projects under construction, the company believes it can grow DCF per share at a 10% compound annual rate through 2020, which should fuel a similar rise in its dividend over that time frame. That growth rate makes the oil pipeline company's already attractive 6.7%-yielding dividend even more appealing.
With Enbridge's share price sliding over the past year, investors can buy this oil pipeline giant's growing income stream for a dirt-cheap price of just 9.5 times DCF. For comparison's sake, the average pipeline stock trades closer to 12 times DCF. As the company's per-share DCF starts heading higher, it should help narrow that gap. Add that upside to the company's high-yield dividend, and Enbridge has the potential to deliver a compelling total return in the coming years, making it a great oil stock to consider buying now.
How quickly investors forget
Reuben Gregg Brewer (ExxonMobil Corporation): Giant integrated oil companies have been heading higher over the past year, with one exception: ExxonMobil. Exxon's stock has fallen nearly 10%, while some peers, including Royal Dutch Shell plc and Total S.A., have seen stock advances in the low teens. Is there something wrong with Exxon?
Exxon is falling short relative to its integrated peers right now on several key metrics, including production growth and return on capital employed. Investors are voting with their feet and buying stock in oil companies that are performing better on a fundamental basis -- right now.
But Exxon's laggard showing is more a function of a corporate culture that errs on the side of caution and long-term thinking than a company that's not worth owning. It has a number of growth projects in the works, including expanding its position in onshore U.S. oil and gas, and tapping new assets offshore in Guyana, Brazil, and Mozambique. It's also looking to improve its return on invested capital from 2017's 7% to 10% or more over the next couple of years.
Investors have forgotten that Exxon's conservative approach helped it weather the deep oil downturn better than most of its peers. Current corporate performance is really the flip side of the equation. But if history is any guide, management will close the performance gap over time as it slowly, and cautiously, turns the giant Exxon ship. If you can look past the near term, Exxon's stock drop is an opportunity to add a high-quality energy company to your portfolio with a yield of 4.1% that's at the high end of its historical range.
Time for a deep dive
So now you have a primer on three top oil stocks, each of which appears to be a compelling value and a great company. I'm certain that at least one of these stocks could fit in your portfolio if you're looking to add a little oil patch exposure -- broadly speaking, of course. But now that your appetite has been whetted, it's time for you to do a little more digging into Ensco, Enbridge, and Exxon. You'll be glad you did.