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3 Top Oil Stocks to Buy in February

By Matthew DiLallo – Updated Feb 5, 2020 at 9:10AM

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These oil stocks offer investors even bigger yields thanks to this year's sell-off in the price of crude oil.

After rebounding more than 25% last year, crude prices have sold off in 2020. As of earlier this week, the U.S. oil benchmark, WTI, was down about 17.5%, putting it close to bear market territory. The main issue weighing on its price is the impact the coronavirus will have on oil demand in China.

The sell-off in the oil market has indiscriminately weighed on most oil stocks, including shares of midstream companies even though they have minimal exposure to commodity prices because long-term fee-based contracts back the bulk of their earnings. With the values of those companies declining, the sector now offers investors even higher yields. Three stocks that stand out as great buys this month are master limited partnerships Energy Transfer (ET -2.53%)Plains All American Pipeline (PAA -0.70%), and MPLX (MPLX -0.60%).

An oil pump and storage tanks with the sun rising in the background.

Image source: Getty Images.

An insanely cheap pipeline company

Energy Transfer's unit price has declined about 2% so far this year, which, when combined with last year's loss, has pushed the MLP's yield up to around 9.6%. That payout is on one of the firmest foundations in the sector since the pipeline giant has been generating enough cash to cover it by an ultra-comfortable 1.98 times. The company has thus been able to retain billions of dollars to reinvest in expansion projects. 

Those expansions, when combined with a recent acquisition, will enable Energy Transfer to keep growing its cash flow this year. That rising cash flow stream not only further improves the sustainability of the company's high-yielding payout but also keeps pushing down the company's valuation. As things currently stand, the MLP trades at less than nine times earnings, which is well below the peer group average of roughly 11. That cheap price, when combined with the company's attractive yield and growth projects, makes Energy Transfer one of the best energy stocks to buy these days.

One step back to take two forward

Units of Plains All American have tumbled 10% this year, even though the price of oil won't have much impact on its financial results in 2020. The company already expected them to decline because of the effects of newly completed pipelines on its volatile supply and logistics business, which delivered outstanding results last year as it helped the industry address its infrastructure issues. Despite that expected decline, Plains All American should produce enough cash this year to cover its 8.7%-yielding distribution by around two times and will continue generating a lot of excess money to reinvest into high-return growth projects.

Several of those expansions will come online next year, which will help reaccelerate its earnings. That will give the company even more cash, which it can use to grow its payout or repurchase its beaten-down units. This upcoming reacceleration, when combined with the company's value and dividend, makes it one of the top stocks for yield-seeking investors to buy this month.

A monster yield backed by rock-solid metrics

MPLX has lost another 9% this year, even though it continues to generate steady cash flow backed primarily by fee-based contracts. That slump has helped push its yield up to an eye-popping 11.9%.

While a double-digit yield often signals trouble, that's not the case here, as MPLX is generating enough money to cover its distribution by a comfortable 1.4 times. That's giving it the excess cash to fund the bulk of its capital expenses. Meanwhile, with its cash flow rising and capital spending on track to fall next year, MPLX expects to produce enough cash to cover both of those outflows with room to spare in 2021, and it could start buying back some of its deeply discounted units. That compelling blend of upside, growth, and yield makes it a great stock for oil investors to buy this month.

Get paid even better thanks to crude's decline

The recent slump in oil prices is weighing on everything oil-related, including MLPs with minimal direct exposure to this volatility. As a result, investors can scoop up some even higher dividend yields this month, led by Energy Transfer, Plains All American, and MPLX. That sets them up to potentially earn some big-time total returns if crude prices bounce back.

Matthew DiLallo has the following options: short April 2020 $12 puts on Energy Transfer LP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Plains All American Pipeline Stock Quote
Plains All American Pipeline
$11.26 (-0.70%) $0.08
MPLX LP Stock Quote
$31.27 (-0.60%) $0.19
Energy Transfer LP Stock Quote
Energy Transfer LP
$11.55 (-2.53%) $0.30

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