3 Top Oil Stocks to Buy Right Now

The oil market continues to be more volatile than most expected it to be this year, with crude recently fetching less than $50 a barrel because of persistently robust supplies. That weaker oil price has weighed on oil stocks and could continue to do so for quite some time. That said, it has also produced the opportunity for investors to pick up some excellent oil stocks at bargain prices as they await the eventual rebound.

Three top oil stocks that caught our eye as being too good to pass up are U.S. Silica Holdings (NYSE: SLCA) , Pioneer Natural Resources (NYSE: PXD) , and ENSCO (NYSE: ESV) . Here's why our investors think they're great buys right now.

An oil pump with the sun breaking through behind the clouds in the background.

Image source: Getty Images.

Improving fundamentals, lower stock price

Tyler Crowe (U.S. Silica Holdings): Watching U.S. Silica's stock price this past year is a great example of the weird mentality of Wall Street. Around May of last year, the active rig count in the U.S. hit rock bottom. Drilling activity has picked up since then, and the idea of higher sand sales sent shares of U.S. Silica soaring. Today, though, the company's quarterly results show that yes, sales have increased dramatically over the past year, but the stock has dropped back to levels we saw at the nadir of drilling activity.

SLCA Chart

SLCA data by YCharts

Today is probably one of the best times to invest in U.S. Silica. Not only are shares trading at low levels, but the fundamentals of the business have also improved substantially over the past year or so. The company has more cash than debt on the balance sheet, management is locking customers into longer-term supply contracts, and it's developing last-mile logistics services that will dramatically improve gross margin per ton. Sales are also likely to grow even more with its new 3 million-ton-per-year mine, located right in the heart of the Permian Basin .

Sand is an incredibly cyclical business, and it's not impossible to foresee frack sand demand declining in the future if oil prices remain stubbornly low. However, considering the financial performance of U.S. Silica and its share price, this is looking more and more like an attractive stock.

An opportunity to take advantage of a misunderstanding

Matt DiLallo  (Pioneer Natural Resources): Up until recently, Pioneer Natural Resources had been a darling of the shale industry. Thanks to its top-tier position in the Permian Basin, the stock had doubled over the past five years despite a 50% plunge in crude prices. Most of those gains, however, have been wiped away over the past few months after the company issued disappointing production guidance during each of the first two quarters of 2017.

Fueling the company's most recent plunge was the revelation that it encountered some unexpected drilling delays that would push the initial production of certain wells into next year, as well as the fact that its wells are producing more gas than expected. As a result of these factors, Pioneer expects production growth to come in at the low end of its 15%-to-18% guidance range for the year, while oil as a percentage of total production will be 58% instead of the 62% it expected. That last factor led the market to infer that the company's wells are producing less oil, which would imply lower margins and returns. However, that's not the case , since its oil output is on target while gas production is coming in higher, which is pushing up the total production per well. In fact, the company has generated $20 million in incremental revenue thanks to this unexpected increase.

Pioneer's drilling misstep and the misunderstanding of the impact of its changing gas-to-oil ratio has provided long-term investors with an excellent opportunity to buy this top-tier driller for a much better price. It's an opportunity that might not last long, which is why this looks like an excellent time to buy.

Silhouette of an offshore drilling rig at sunset.

Image source: Getty Images.

Offshore will eventually recover (and this driller should be one of the winners)

Jason Hall  (ENSCO PLC): It's hard to argue that any other sector has been hit harder than offshore drillers during the oil turndown. 2016 will be the fourth consecutive year of declining offshore activity and spending, making this easily the worst downturn since the start of the modern offshore drilling industry around 50 years ago.

But eventually the demand for offshore oil and gas will recover. There are already some signs of a recovery, with an uptick in bidding and contract awards so far this year. However, little of that work is new awards, and 2017 will almost assuredly end with fewer vessels under contract than it started with -- and there will also probably be fewer drilling companies in business.

And while this situation also makes for a treacherous sector to invest in, it also makes for one with some very strong potential winners. One that I particularly like is ENSCO, especially after its pending acquisition of Atwood Oceanics, Inc . The purchase of Atwood will add that company's high-specification and new fleet of vessels to ENSCO's, a move that will should pay off handsomely when offshore demand recovers in the next couple of years. In the meantime, ENSCO's $3 billion-plus backlog of contracted work, and the combined nearly $4 billion in liquidity the two companies have, should be far more than needed to ride out the downturn.

What it really boils down to is this: At 16% of book value, ENSCO is incredibly cheap, even with the risk that the downturn drags on longer. Eventually offshore will recover, and ENSCO is positioned to be a major player. When that happens, patient investors who buy at current prices could do incredibly well.

10 stocks we like better than U.S. Silica Holdings
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Jason Hall owns shares of Atwood Oceanics and Ensco. Matthew DiLallo has no position in any of the stocks mentioned. Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool owns shares of Atwood Oceanics. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Stocks
Referenced Symbols: PXD , ESV , SLCA

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