5 Best Oil Stocks to Buy Now - YouTube

Energy stocks have been slammed by the price of oil and the sector is the worst in the

market over the past five years, but that might mean now is the perfect time to buy.

In this video, I’ll show you what I look for to find the best of breed in the space,

then I’ll reveal the five best oil stocks for your portfolio.

We’re talking top oil stocks to buy today on Let’s Talk Money!

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Hey Bowtie Nation, Joseph Hogue with the Let’s Talk Money channel.

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Hey, I’m excited nation.

This is the second video in our series on picking the best stocks in each sector and

the response has been amazing.

That first video on the best tech stocks was one of the most popular ever in the first

few days and I’m excited about this one!

America is undergoing an era of energy independence.

It’s now the largest producer of crude oil in the world and will be the top oil exporter

soon as well.

The oil boom is driving an energy renaissance and every portfolio needs a piece of the action.

Now because of worries around global growth, a lot of the companies in the energy sector

have been hit hard on lower prices over the last few years.

The sector fund has underperformed the broader market by more than 85% over the last five

years.

But nobody ever got rich buying when stocks were expensive and this may be the only cheap

sector in the market.

If you look at the sectors by forward price-to-earnings, that’s the price divided by earnings analysts

expect in the sector over the next year, the energy sector is THE ONLY ONE to trade at

a discount to its 10-year average.

The dark blue line there is the forward PE for the sector, right now at 17.1-times for

stocks in the energy sector.

The green bar is the average forward PE value for over the last ten years, so 20.3-times

for the sector.

That means energy stocks are trading at a discount of 16% over that longer-term average.

That gets even more amazing when you consider some sectors like tech are trading for a 30%

premium, a third more expensive than that 10-year average and the broader market, here

using the S&P 500, is trading at 17-times its forward PE or 14% higher than the long-term

average.

This might just be your once in a decade opportunity to buy oil stocks at a discount.

If you’re just joining us, we’re doing 11 videos to reveal the best stocks to buy

in each sector of the economy.

I’m looking at each sector from tech to energy, consumer goods and utilities to show

you how to find the best of breed companies in each and create that diversified portfolio

for growth and cash flow.

This is hugely important because even though I love the opportunity in oil stocks right

now, you have absolutely got to have stocks in those other sectors.

It’s going to give you the diversification you need, smooth out those returns, while

you wait for the rebound in energy stocks.

So let’s get started because I’m excited to talk oil stocks with you.

If you’re coming in later to the series, I’ll link in the first comment below the

video to the most recent video.

I’ll also be linking in the video description, all the videos in the series so you can see

all the stocks for each sector.

Now those of you in the nation know, I’m not about to just throw five stock picks at

you.

I’m going to show you how I picked these stocks first, give you the tools to do this

on your own.

Then I’ll show you three energy sector funds you might consider buying to get that targeted

exposure to the sector before I reveal the five oil stocks I’m buying right now.

Here’s that graphic again of the stock sectors and today we’ll be looking at energy including

explorers, pipeline operators, those large integrated companies and the drilling equipment

companies.

So I looked for four criteria when screening for these stocks to buy.

I’m going to run through these quickly because I want to get to those stock picks and I already

walked through each in our first video on tech stocks.

If you don’t know exactly how I’m using these, the process I use to pick stocks, please

check out that video linked in the description because these are fundamentals you need to

be using anytime you pick stocks.

Screening for increasing sales and cash flow are extra important with oil stocks lately

because of the trouble they’ve had on lower crude prices.

Any company that can produce sales and cash flow in this environment is a solid bet.

That operating margin is powerful, like Thanos on steroids powerful, and the number one factor

I always use to find stocks to buy.

This is the operating income, so what’s left after taking all the business expenses

out of sales, so that baseline business profit then divided by sales.

It’s the best measure of how well management is doing and something you want to compare

against competitors to find the best run companies.

Dividends are another obvious choice.

I love getting paid while I invest and dividend payers just tend to beat other stocks.

I’ve picked some cash flow machines in the sector, one with a dividend yield of ten percent,

so stay tuned for that.

Finally, I’m looking for companies with a competitive advantage and catalysts for

growth.

You see, the other factors are mostly already baked into the shares.

The market knows the company’s rate of sales growth, it’s operating margin and dividend

yield.

It’s these catalysts you find and the competitive advantages that make for great long-term investments.

I’ll share those five oil stocks I found next but first I want to highlight three energy

funds you might also consider.

If you can’t find stocks you really like, so if no stocks fit your screening, you might

consider putting some money into these funds just to get that exposure to energy investing.

Then you can invest in stocks of other sectors like we’ll talk about in the series but

still have some of that high dividend yield from energy.

Our first tech fund is the Energy Select Sector SPDR, ticker XLE.

This holds shares of 28 of the largest energy companies based in the U.S. but is surprisingly

diversified from upstream explorers to downstream retail.

Companies in the fund have an average market cap of $130 billion dollars so we’re talking

the largest like Exxon, Chevron and Valero Energy.

The fund charges an expense ratio of 0.13% which is extremely low and pays a 3.7% dividend

yield.

While that XLE fund gives you broad exposure to the energy sector, the SPDR S&P Oil & Gas

Exploration & Production ETF, ticker XOP, is much more focused on that upstream segment

of energy, drilling and producing the oil.

This fund holds shares in 60 companies drilling and producing the oil & gas, mostly in the

U.S. and there are a couple of reasons I like this better than the more popular sector fund,

that XLE.

First is the average market cap here is just $23 billion, which is still big companies

but not that mega-cap we saw in the XLE.

That means a little more flexibility and faster growth for these stocks.

You’ve also got a more diversified fund.

That XLE has more than 40% of its assets in just two stocks, Exxon and Chevron, while

no single stock accounts for more than 3% of the XOP.

Now it’s not all roses and rainbows.

The XOP fund has a higher expense ratio at 0.35% and a lower dividend yield at 1.4% but

is a great fund for your portfolio if you don’t want to pick individual oil stocks.

This last fund before we look at those five best stocks in energy is going to come as

no surprise to those of you in the nation.

This fund is in our 2019 dividend portfolio and I love the theme for long-term dividends.

The Alerian MLP ETF, ticker AMLP, holds shares of 32 master limited partnerships which are

special types of energy companies with huge yields.

The fund currently pays an 8.4% dividend and look at it against some of these other high-yield

and cash flow options.

More than twice the dividend yield compared to REITs and four-times the yield you get

from the broader market.

The fund invests across companies in that midstream segment of energy; the pipeline

transportation, refining and storage.

These companies charge a fee on volume so it’s not all about the price of crude here.

They get a special tax break if the majority of profits are passed through to investors

so you get an insanely high yield on the fund.

Even if you do invest in a few oil stocks like the ones I’ll highlight now, you might

still consider putting money in some of these funds.

That’s going to give you the opportunity for higher returns from that individual stock

pick but also spread your money out a little across the dozens of companies in the fund.

Our first two oil stocks are going to be cash flow monsters in the MLP space with Energy

Transfer, ticker ET, and it’s 9.9% dividend yield first.

ET is a leader in midstream with 9,300 miles of crude pipeline, making it the largest in

the U.S. and assets across the transportation, processing and storage space.

MLPs have been hit just as hard as the rest of the energy space since 2014 but there are

some strong reasons to buy in here.

Energy transfer was investing over $8 billion a year in acquisitions and development from

2015 through 2018.

Assets were cheap after the 2014 crash and management made some very smart moves.

Now a lot of those big development projects are coming online and starting to cash flow.

Combine that with the fact that management plans on cutting investment spending in half

to just $4 billion a year and cash flow could surge.

The company had a coverage ratio of 2.0-times the distribution in the most recent quarter

and this is a very important measure for MLPs so I want to explain it a little.

The coverage ratio is the company’s distributable cash flow, the cash it has left over after

maintenance spending, over the amount is distributes to shareholders.

Some MLPs will have a coverage ratio less than one, meaning they’re paying out more

than is available, something that obviously can’t go on for long.

So for Energy Transfer to be able to cover it’s distributions, a yield that’s almost

10% right now, to be able to cover that by two-times means that cash flow is all but

guaranteed.

Better though is that management expects the coverage ratio to come down to around 1.8-times

long-term which to me hints that they expect to increase the dividend, right?

Cash flow isn’t decreasing with all these new projects and lower investment spend, so

there’s only a couple other things they can do with that money.

ET is either going to begin buying back massive amounts of its stock or hiking the dividend,

or both and that’s going to send the shares higher.

Of the seven analysts covering Energy Transfer, the lowest price target is $18 per share or

about 46% above the current.

The high target at $24 a share is nearly double the current price.

Now there is one thing you need to know about MLPs, something we’ve covered here on the

channel but I want to make sure you get it here.

MLPs are a special type of company and you’ll get a special tax form called a K-1 each year

you own shares.

That form is going to detail different types of returns from the shares and you put this

into your taxes differently than other dividend stocks.

You don’t get that K-1 tax form when you invest in the AMLP fund which is why a lot

of people just put their money in it instead of individual MLP companies but the form really

isn’t difficult.

Any tax software like TaxAct or TurboTax makes it easy and any tax service will do it for

you.

For my money, there is just too much opportunity in these MLPs to pass up because of that little

extra effort on your taxes.

Enterprise Products Partners, ticker EPD, is similar to Energy Transfer in that midstream

MLP segment.

Now the dividend yield is only 6.6% here though the share price has held up better than ET

over the last five years and there’s good reason to believe both the price and dividend

are heading higher.

EPD is a massive company with 50,000 miles of pipeline transporting crude, natural gas

and other chemicals.

It’s connected to every major U.S. shale play and 90% of the refineries east of the

Rockies.

Researching the company, I found three charts that really prove the case for investment.

First, this graph in the upper-right.

The blue and grey lines are the company’s operating profits and distributable cash flow.

That red line is the price of crude and you see how much oil prices have jumped around

but the company’s cash flow has grown consistently.

This is because the company makes 85% of its gross operating profits on a fee-basis.

It charges oil companies a fee for using the pipelines and charges on volume rather than

the price of oil.

This company is generating massive amounts of cash regardless of where oil prices go.

The next chart here in the lower-left again shows oil prices in that red-dash against

a steady climb in the distribution and cash flows per share.

This is a company you can count on to consistently increase the payout.

And finally here, the blue section in that lower-right chart shows the cash paid out

to investors with the grey area the cash the company is saving.

The company has a distribution coverage of 1.7-times so lots of cash flow above the distribution

and its cash reserves are growing.

That’s going to mean more increases in the distribution and share buybacks to drive the

stock price higher.

Not as many analysts covering EPD but target prices are all well above the current share

price.

The low target here is for $33 a share with the high around $41 and remember, this is

beyond the 6.6% dividend yield you collect.

Energy giant BP has had its problems but the shares have actually outperformed the broader

energy sector over the last few years and its paying a monster 6.4% dividend.

The company reported a pretty awful third quarter, sending the shares down 3% but production

and financials should improve over the coming quarters.

Operating cash flow was still solid at $6.5 billion and more than enough to cover investment

spending and the dividend.

BP owed a $2 billion payment this year to cover the Deepwater Horizon settlement but

that drops to just $1 billion annually for the remainder.

The company has been cost-cutting since 2013 which is supporting cash flow and profits.

Shares trade for just 10-times earnings though profits are expected lower to $3.13 per share

over the next year.

Looking at the company’s history of beating expectations, I think earnings can come out

around $3.30 on the low side which would mean a price-to-earnings of 11.5-times, still in

that value territory.

One potential for surprise upside is BP’s 20% ownership of Russian oil giant Rosneft.

The asset value has taken a hit on geo-political tensions and earnings are down on lower crude

prices but this could make for a boom in the shares if the picture improves.

I’m showing this chart because I’ve used it on all the other picks but you probably

shouldn’t read too much into it.

With just two analysts rating the shares, you really can’t get much from the $53 price

target.

I think the shares could be worth at least $45 each over the next year and higher over

the long-term.

You’ve got some good potential for price appreciation and a solid dividend payer while

you wait.

Baker Hughes, ticker BKR, is kind of a weird case with it’s 2017 merger then split from

GE earlier this year.

BKR was rapidly losing market share in its oilfield services business until the 2017

merger but has been able to turn it around over the last couple of years.

Revenue in the segment was up 12% year-over-year in the last quarter which is way ahead of

competitors reporting sales that are flat and even lower over the year.

Shares are trading a little rich at 26-times earnings but it’s because profits are expected

to boom 60% over the next year which puts the forward price-to-earnings at just 16-times.

Analysts see the shares higher with a low target of $27 per share to a high target of

$34 each over the next year.

I’m not sure the shares reach that high target but even the lower one is a 26% return

on top of the 3.3% dividend yield.

Marathon Oil, ticker MRO, is a smaller oil exploration company at just $9 billion market

cap but pays a 1.7% dividend and has strong upside potential.

The company has struggled under lower oil prices for the last few years but reported

second-quarter results that were well above expectations.

Oil production came in at the top end of what everyone was expecting and a cost-cutting

program has lowered production costs to their lowest ever.

Just like with BP, we’re looking at expectations for earnings to decrease over the next year

but the street is notoriously bad at predicting earnings for this company.

For example, it beat expectations by 342% and 77% in the first and second quarters.

On a trailing basis, shares trade for about 12-times earnings and are probably better

than they look on a forward basis.

Despite the tough earnings picture, analysts have price targets between $13 a share on

the low-end and $21 per share at the high-end.

Click on the video to the right for the first in our series and the five best tech stocks

for your portfolio.

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