Oil demand and production are both growing steadily, and it seems like the good times will keep rolling for oil stocks. Everyone from producers to marketers of oil have a lot to like in today's market.
We asked three Motley Fool contributors for their favorite oil stock, and ExxonMobil (XOM 0.15%), EOG Resources (EOG 0.90%), and Kinder Morgan (KMI +0.16%) made the list. They play in different parts of the market, but each has strengths that are the envy of competitors.
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If you want to bet big on oil, bet on a big oil company
Rich Smith (ExxonMobil): A little over a month ago, I named ExxonMobil as a top oil stock to buy right now -- i.e. right then. A little over a month later, the stock, well, it actually still trades within just a few pennies of what it cost back then.
And logically, if it was a great oil stock to buy then, then it probably remains so today -- so I'm recommending it again.
Now admittedly, a few things have changed since I made my first recommendation. Oil prices, for one. From early May to late June, the prices of both WTI crude oil and Brent have fallen more than 10%. But while you might think that cheaper oil would mean a cheaper stock price for this oil company, that so far isn't the case.
Why not? I'd argue that one reason is because ExxonMobil stock is pretty cheap already. Priced at less than 18 times trailing earnings, Exxon already trades at a discount to analysts' expected 18% long-term earnings growth rate for the stock -- and that's before you factor in Exxon's 4.5% dividend yield, which is more than twice what the average S&P 500 company pays.
At the same time, the situation in the Strait of Hormuz -- far from cooling down after suspected Iranian mines damaged two oil tankers earlier this month -- appears to be heating up in the aftermath of the shootdown of a U.S.-owned drone aircraft by Iranian forces last week. That's already having an impact on oil prices, which are up 10% from their low point earlier this month. Until the crisis is defused, I'd expect it to continue pushing oil prices -- and Exxon profits -- upwards in the weeks to come.
A plan to outperform
Matt DiLallo (EOG Resources): Shale drilling giant EOG Resources has a bold goal. It wants to be "one of the best-performing companies in the S&P 500," according to CEO Bill Thomas. That's not just wishful thinking. The oil producer has the resources and the strategy to deliver on that aim, which makes it one of the top oil stocks to buy.
EOG Resources has a threefold strategy to enrich its investors. First, it wants to deliver a double-digit return on the capital it employs on expanding its business. Last year, for example, it produced a 15% return on the money it invested, thanks in part to higher oil prices. While oil prices will always play a role in the returns it earns, EOG is working on getting to the point where it can deliver on this goal even if oil is in the $40s.
The second leg of EOG's strategy is to grow its high-margin oil production at a double-digit annual rate. That will enable the company to expand its cash flow at a similarly fast pace. For 2019, the company is on track to increase its oil output by 12% to 16%. Meanwhile, it has more than 9,500 high-return drilling locations remaining, which is enough to fuel double-digit growth for more than a decade.
Finally, the company wants to live below its means so that it can generate free cash. That will give it the money to continue growing its dividend at a high rate. It has already increased its payout by 31% this year and aims to increase it by a more than 19% compound annual growth rate in the coming years.
"Our goal of double-digit returns, double-digit growth, and free cash flow puts EOG in line with the best companies across all sectors in the market," according to Thomas. With a strategy designed to outperform, EOG is among the top oil stocks to buy.
The midstream oil play
Travis Hoium (Kinder Morgan): Oil companies have a lot riding on the price of oil, which can make their stocks risky, but I think the better bet long-term is the growing production of U.S. oil and natural gas. That's why I think the top oil stock is midstream giant Kinder Morgan.
Kinder Morgan owns primarily pipelines that move oil and natural gas from one place to another. It doesn't necessarily need prices to be high to succeed, but it does need production to grow. And the trends are squarely in the favor of growing fossil fuel supply.
U.S. crude oil production. Data by YCharts.
Kinder Morgan's results aren't solely tied to natural gas production, but that's a good proxy for the health of the industry overall. The company charges fees for service, essentially charging a toll from product moving through its pipelines. That creates a predictable stream of cash flows and ultimately drives the current dividend rate of $1 annually per share.
If you don't want to bet directly on the price of oil, a midstream company like Kinder Morgan can be a great alternative to oil producers. And with a steady business and a dividend yield of 4.8%, this is a stock that will begin generating returns immediately.
Oil is hot in 2019
Oil production continues to be strong in the U.S. and prices are holding in well as the economy keeps growing. That's helping oil stocks, and if you're looking to add to your portfolio ExxonMobil, EOG Resources, and Kinder Morgan are a great place to start.
