Crude oil has been scorching hot this year, rallying more than 30% through mid-December. Fueling that big gain has been the efforts of producers such as OPEC to keep a lid on supply and support pricing.
Usually, higher oil prices drive up energy stocks. However, that hasn't been the case this year, as the average one in the S&P 500 is up only about 8%, while the index itself has surged nearly 30%, leaving oil stocks to trade at much more attractive values. Three of the most compelling names to buy right now are refiner Marathon Petroleum (NYSE:MPC), upstream producer Devon Energy (NYSE:DVN), and master limited partnership (MLP) Plains All American Pipelines (NYSE:PAA). Here's a look at why this trio of oil stocks stands out these days.
Pushing for change
Refining giant Marathon Petroleum has meandered along most of the year. Overall, the stock has gained about 4%, while it has generated a total return close to 8% after adding in its 3.5% yielding dividend.
That lackluster performance has one of the company's leading investors -- hedge fund Elliott Management -- pushing it to make changes to unlock shareholder value. Among the things it wants Marathon to do is spin off its gas station business, Speedway, which the company plans to complete by the end of next year.
In the view of Elliott Management, moves like that could unlock significant shareholder value. Add that to the company's high-yielding dividend, which it has grown at a 21% compound annual rate since late 2011, and it has the potential to produce significant total returns in the coming years. That upside makes it a great oil stock to buy these days.
Completing the transformation
Devon Energy has performed a bit better this year, as its stock has risen about 11%. Add in its 1.5%-yielding dividend, and the total return has been around 12.5%.
However, those gains don't fully reflect what the company has accomplished over the past year. Devon has sold off several lower-margin assets, which gave it the cash to repay debt and buy back stock. Since 2017, the company has already spent $4.8 billion on repurchases, which has retired nearly 30% of its outstanding shares. Meanwhile, having recently finishing its transformation plan, it has the money to retire another 13% of its outstanding shares in the coming year at the current stock price.
In addition to significantly shrinking its share count, Devon has dramatically dropped its oil breakeven level, which is the price required to generate enough cash to fund its expansion program. For 2020, Devon can finance its growth plan at $48 oil, which is well below the $60-plus it needed a few years ago. Now the company is on track to generate significant free cash flow in the coming year. If oil stays around its current level of $60 a barrel, Devon could produce $675 million in free cash. That implies a free cash flow yield of more than 8%, one of the highest in the oil patch. That attractive value, when combined with its growing dividend and share repurchase program, makes Devon one of the more compelling stocks in the U.S. oil sector.
No reward for an exceptional year
Plains All American has delivered the worst performance of this trio. Overall, units of the MLP have declined by about 10% this year. Meanwhile, the total return after adding in its 8%-yielding dividend is a negative 4%. It trades at a dirt-cheap level of less than 7 times its cash flow.
That poor performance comes even though the oil pipeline company has had an exceptional year. The company outperformed its expectations all year, leading it to boost its earnings forecast each quarter, and it's now on track to grow by nearly 15% this year. It's also on pace to generate enough cash to cover its high-yielding payout by more than 2 times.
Plains All American expects to continue growing in 2020, albeit at a slower rate of about 4%. However, its growth rate should reaccelerate in 2021, when it completes another wave of expansion projects, and it should be able to continue growing its high-yielding payout. Add that growing income stream to the company's ridiculously cheap valuation, and Plains All American has the potential to generate big-time total returns in the coming years.
Lots of attractive options in the oil patch these days
Oil prices have bounced back sharply this year, which usually takes oil stocks up with them. However, that hasn't been the case this year, as most have vastly underperformed crude oil. The sector is quite attractive these days as bargains abound. While lots of options look appealing, Marathon Petroleum, Devon Energy, and Plains All American Pipeline stand out as being the best ones to buy right now.