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3 Top Energy Stocks to Buy Right Now

By Tyler Crowe, Rich Smith, and Jason Hall - Nov 28, 2018 at 9:17PM

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Shares of Ensco, Enterprise Products Partners, and CNOOC look incredibly attractive right now.

All of the slow, gradual gains oil prices made from 2017 to up until a month ago have disappeared in a matter of days. Concerns about Iranian oil being taken off the market ended up being all for naught, American shale production has blown past even the most ambitious expectations, and there are now concerns of an economic slowdown that could crimp demand. 

Factors like these impact the price of oil, but they tend to be shorter term. Investors with a longer-term view could point to other factors that could make an investment in oil and gas a prudent one. So we asked three Motley Fool contributors to highlight an energy stock they see as an interesting investment today. Here's why they picked Ensco PLC (VAL), Enterprise Products Partners (EPD 1.07%), and China National Offshore Oil Corporation (CNOOC) (CEO)

Drilling rigs in a dock.

Image source: Getty Images.

 The risk-reward profile is even better now

Jason Hall (Ensco PLC): In September, I made the case that offshore drilling contractor Ensco was a top energy stock to buy at the time. Since then, this has happened:

ESV Chart

ESV data by YCharts.

And I'm sticking to my guns on Ensco, because as much as oil prices have fallen sharply over the past two months, the company's prospects heading into 2019 and beyond remain solid. Frankly, they're even better now than they were two months ago. 

When Ensco released its third-quarter results and fleet status report, it announced it had secured new contracts or extensions for 16 of its vessels, more evidence that the offshore recovery is happening and that oil producers are loosening the purse strings. 

But that was only part of the good news. Ensco also recently announced it was acquiring Rowan Companies, which will address its last real fleet weakness: its older jack-up fleet. Rowan brings along a substantial high-spec fleet of jack-up vessels, many of which are under long-term contract at profitable rates. The combined company will carry nearly $2 billion in cash and very little near-term debt, giving it a substantial cushion to ride out the recovery. 

There's more: At recent prices, Ensco trades for 32% of the book value of its assets. That's $0.32 on the dollar for shares of a solid company in an industry that historically trades for a premium to its book value. The offshore recovery is still early, and oil prices will continue to be the tail that wags the dog, but patient investors willing to ride out the volatility would do well to buy Ensco now. 

Too good of a business to pass up at this price

Tyler Crowe (Enterprise Products Partners): When oil and gas prices start to drop, Wall Street tends to abandon the entire industry indiscriminately. While prices are the lifeblood of producers, companies in other parts of the value chain may not necessarily be affected. Enterprise Products Partners is in the business of moving, processing, and exporting oil, gas, and the various products derived from hydrocarbons. This fee-based business is much more concerned with the volume moving through its system than the price of the product it moves. With oil and gas production in the U.S. hitting all-time highs lately, Enterprise's business couldn't be better

Unfortunately, Enterprise's stock price hasn't reflected the great results the company has produced lately. Its stock price is down 16% over the past five years (on a total-return basis that includes distributions, it's up 9%) and its current distribution yield of 6.6% hasn't been this high since the Great Recession. 

The one thing you could point to as a reason to stay away from the stock was management's decision last year to slow the rate at which it grows its payout. Management saw that there were incredible investment opportunities because of America's booming production and wanted to retain more cash to invest in growth. Once this phase of growth starts to fade, though, it intends to accelerate distribution growth or potentially start a share repurchase program.

It's hard to get excited about the stock's performance lately, but management is making the right moves for the long term and its current price lets investors buy this great business with a high yield.

ESV Chart

ESV data by YCharts.

Buy an oil stock? In China? Are you crazy?!

Rich Smith (CNOOC): I realize that right now is not a popular time to own oil stocks -- or Chinese stocks for that matter. Oil prices have slid 25% since the beginning of October, and Chinese stocks have been selling off even longer than that. Regardless, I'm going to go out on a limb and give you a Chinese oil stock that you might want to buy right now anyway: CNOOC.

Why? In a word: cash. For years, I've been saying the main reason I've never wanted to own ExxonMobil (or any oil company) is because oil company-reported profits always seem to overstate actual free cash flow -- and as a result of not producing as much cash as they should, oil companies always look mired in debt.

And yet, take a look at CNOOC's numbers: $5.4 billion in positive free cash flow -- that's 5% more than reported net income; $20.3 billion in cash on the balance sheet -- $1 billion more cash than debt; a projected long-term earnings growth rate of 35%, according to analysts polled by S&P Global Market Intelligence. And finally, a dividend yield of 4.1% that's almost identical to Exxon's 4.2% yield -- as if all the rest weren't already good enough.

When you consider, too, that Exxon continues to show free cash flow inferior to reported net income, $34 billion more debt than cash on its balance sheet, and an expected growth rate barely half as fast as CNOOC's, I think it's plain to see that China's CNOOC is a better energy stock to buy right now.

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Stocks Mentioned

Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
$24.63 (1.07%) $0.26
CNOOC Limited Stock Quote
CNOOC Limited
Valaris plc Stock Quote
Valaris plc

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