The oil market is roiling right now, with crude oil prices still about half what they were less than a year ago. To paraphrase Warren Buffett, oftentimes the best investments come when Mr. Market is fearful, and prices are way down. The key to Buffett's "being greedy while others are fearful," though, is knowing the difference between a beaten-down stock and a business that is in trouble.
With that in mind, we asked three of our energy experts for their thoughts, and they gave us their three best oil stocks for your portfolio: ConocoPhillips (NYSE:COP), Phillips 66 (NYSE:PSX), and Magellan Midstream Partners, L.P. (NYSE:MMP), three companies that do very different things in the petroleum business. Does one of them fit your portfolio? Let's take a closer look.
Matt DiLallo (COP): ConocoPhillips is one of the best oil stocks for an investor looking for an energy producer as a core holding. There are three reasons why I like ConocoPhillips best: It has a strong balance sheet, offers global diversification, and has put a priority on growing both production and margins. Those key features enable the company to withstand weak oil markets and then thrive once conditions improve.
As we saw over the past year, the price of oil can turn on a dime, which is why having a strong balance sheet is a must. ConocoPhillips has an investment-grade credit rating and its debt trades in the A to AA range. The company also has no near-term debt maturities, plenty of credit capacity, and a lot of cash on its balance sheet. This strong balance sheet not only provides ConocoPhillips with significant security during the downturn, but it gives the company tremendous flexibility to create value should a compelling opportunity arise.
The other big difference between ConocoPhillips and most other U.S. independent oil companies is its vast geographic diversity. The company's operations span the globe, as well as different energy projects. These include operations in all key U.S. shale plays, oil sands operations in Canada, offshore production in the North Sea, LNG assets across several continents, and deepwater exploration programs around the world. This gives the company the flexibility to invest wherever it can earn the highest returns.
Return-driven growth is what really differentiates ConocoPhillips from other large oil companies. Its focus isn't on simply growing production, but on growing its highest-margin production. The company plans to boost production and margins by 3%-5% per year, which would provide annual cash flow growth of 6%-10%, adjusted for commodity prices. That's the opposite approach of most other energy companies that must rely almost solely on production growth.
Add it all up and ConocoPhillips is one of the best overall oil stocks for the long-term investor.
Jason Hall (PSX): Phillips 66 is one of the largest and best refiners in the world, and its refining business is a cash cow, having produced 37% of the company's net earnings and 41% of earnings adjusted for one-time events in 2014. Furthermore, demand for refined products is strong and growing. The company's long-term story, though, is tied to growing both its midstream and chemicals businesses.
The company expects to grow its adjusted EBITDA by about 32%, to $8.4 billion, in 2018; this would by and large be a product of growth in the midstream and chemicals businesses, and not its refining or marketing segments. Why? Cheap natural gas and liquids, which are driving huge investment in both infrastructure and manufacturing capacity in the U.S. Not only will Phillips 66 continue to reap the profits from its oil refining operations, but it will also benefit from expanding its pipeline operations, and taking advantage of cheap domestic gas as a feedstock for its chemicals business. Last year these segments produced 34% of earnings. In less than five years, these segments could account for more than half of Phillips 66's earnings, even as the refining business continues to pump out gobs of cash.
Tyler Crowe (MMP): Since Matt and Jason picked a producer and a refiner, I think it's only fitting that I pick the segment of the energy industry that works as the go-between for these two segments: pipelines and midstream. With so much more oil and gas moving around the U.S. these days. I'm very bullish on the future of Magellan Midstream Partners.
With the nation's largest network of refined petroleum product (gasoline and diesel) pipelines, as well as an extensive storage and terminal business that generates more than 85% of its revenue from fees, Magellan Midstream is a lower-risk investment in the energy space in which its success does not wax and wane with the price of oil in a way akin to those producers and refiners.
What really sets Magellan apart from the midstream industry is management. Not only did it have the wherewithal to buy out its general partner -- which makes it less expensive to raise capital -- but the team has proven adept at allocating capital to a right blend of organic projects and acquisitions. This approach has enabled the company to grow its distribution at a compound annual rate of 12% since 2001, as well as maintain a safe distribution coverage that leaves a little extra cash on hand to fund those projects and acquisitions.
The oil price crash might not have sent shares of Magellan plummeting, but it hasn't done the stock any favors, either. As long as Magellan can meet its target of raising distributions by 15% this year, investors getting in today can expect that 3.45% distribution yield to pay off quite well.
Jason Hall owns shares of Phillips 66. Matt DiLallo owns shares of ConocoPhillips and Phillips 66. Tyler Crowe owns shares of Magellan Midstream Partners. The Motley Fool recommends Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.