Sometimes an industry just takes off without warning. So it was in late 2017 with the oil industry: Prices went up as companies were beginning to see the effects of belt-tightening, and suddenly the long-suffering sector was having a heyday. But while outperformance is good for investors, it can make it tough to find a new investment that's fairly valued.
With that in mind, we asked three of our Motley Fool contributors what oil stocks they'd pick as best to buy right now. They came back with ExxonMobil (XOM -0.09%), MPLX (MPLX 0.55%), and Enbridge (ENB 1.71%). Here's why.
The oil industry has suddenly become one of the stock market's darlings. Image source: Getty Images.
A big find for a big oil company
John Bromels (ExxonMobil): The biggest of the big oil companies has actually underperformed its peers over the last three years, with a share price that appreciated just 5.6%, compared to gains of at least 20% for the other oil majors. Its valuation, too -- as measured by its trailing price-to-earnings ratio -- is also among the lowest of its peer group. But that's not the only reason to consider buying Exxon.
Naturally, with oil prices at or near their three-year highs, oil companies stand to benefit. But Exxon has been benefiting less than its peers, thanks to declining production numbers that have investors spooked. But Exxon is investing in new projects that could have the ability to offset some of those declines. In particular, its offshore play in Guyana could be the gold mine investors have been waiting for.
The amount of petroleum underneath the so-called Stabroek Block was already thought to be massive: an estimated 3.2 billion barrels of oil equivalent (BOE). But in late July, Exxon announced that additional testing indicated that the amount was likely more than 4 billion BOE. As a result, the company is considering an additional two phases of development that would give the block the potential to produce 750,000 BOE/day by 2025. In the most recent quarter, Exxon produced about 3.9 million BOE/day, which means the Stabroek Block could eventually boost production by about 20%.
Of course, that's several years away, and the first oil won't flow in earnest from Guyana until 2020. But Exxon pays a decent 3.7% dividend yield, and with its share price low compared to its peers, now could be an excellent opportunity to buy into this industry bigwig before the crowd.
An underappreciated income investment
Tyler Crowe: (MPLX LP): When investing in high-yield stocks within the midstream part -- transportation, processing, and logistics -- of the oil and gas value chain, there are three things you want to see as signs of financial health: a vast majority of revenue contracted on a fixed-fee basis, the ability to cover a payout with a healthy amount of cash left over, and a clean balance sheet with an investment-grade credit rating. A company that checks all of these boxes is MPLX, and it looks as though it will be able to maintain these qualities while significantly increasing its payout over the next few years.
MPLX is a subsidiary partnership of oil refiner Marathon Petroleum (MPC -3.67%), and Marathon is the predominant customer for several of MPLX's services, such as fuel distribution and storage. Ever since the partnership went public back in 2012, management has done a good job of targeting growth in fee-based services and allocating capital in a rather conservative manner. Its distribution coverage ratio -- the amount of cash available for distribution divided by cash paid out -- has remained above 1.2 since it went public, and its most recent coverage ratio was 1.29.
This is a conservative payout ratio for master limited partnerships that allows management to reinvest in the business and help keep debt levels in check. At the end of the quarter, MPLX had a debt-to-EBITDA ratio of 3.7. That is significantly higher than it has been in the past, but still puts it on the low end of large MLPs.
After a recent corporate restructuring that better aligns its parent company's stake with the rest of its investors, the company looks like a solid income investment. To add the cherry on top, management projects distribution growth in 2018 to be 10%. With that kind of growth backed up by solid financials, this is a stock to put on your radar.
The worries have quickly faded
Matt DiLallo (Enbridge): Shares of Canadian energy-infrastructure giant Enbridge have been under pressure over the past year, falling more than 10%. Driving the pipeline stock's decline has been concern about its ability to fund its massive slate of expansion projects, due to the amount of debt on its balance sheet and an unexpected issue impacting its MLPs Spectra Energy Partners and Enbridge Energy Partners.
Enbridge has addressed these concerns head-on in 2018. After initially planning to sell 3 billion Canadian dollars' ($2.3 billion) worth of noncore assets this year, the company has now completed three deals that will raise about CA$7.5 billion ($5.7 billion), significantly enhancing its financial flexibility. In addition, the company offered to buy out all its publicly traded entities; this CA$11.4 billion ($8.7 billion) deal would sidestep the issues, simplify its corporate structure, enhance its credit profile, and increase the amount of cash it retains to fund growth projects.
These announcements have already started lifting the weight of uncertainty that had been holding down Enbridge's stock, driving shares up by double digits from the bottom in the last month. However, there's still ample upside ahead, given how far the stock has fallen in the past year, and its expectations of growing both cash flow and its 5.9%-yielding dividend at double-digit paces for at least the next two years. That income with upside makes Enbridge an excellent energy stock to buy right now.
