The oil market has been scorching hot this year. Crude prices just enjoyed their best quarter in a decade, which has helped buoy energy stocks. While that rally sent shares of most oil-related stocks higher, we still see some attractive opportunities in the sector.
Three that top our list are oil producer EOG Resources (NYSE: EOG), midstream giant Kinder Morgan (NYSE: KMI), and LNG export project developer NextDecade (NASDAQ: NEXT). Here's why we think each one looks like it can produce market-beating returns from here.
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Focused on fueling outperformance
Matt DiLallo (EOG Resources): Leading U.S. oil producer EOG Resources has a bold goal. CEO Bill Thomas laid it out on the company's fourth-quarter conference call. He stated that "our long-term game plan is simple: be one of the best-performing companies across all sectors in the S&P 500."
Thomas then detailed the three factors that EOG believes can take it to the top. First, it wants to generate double-digit returns on capital employed. It will do that by investing in wells that earn a high return on investment. Second, the company aims to deliver double-digit growth throughout the commodity price cycle. EOG plans to do that by remaining disciplined in both good markets and bad so that it can consistently grow its business. Finally, the company wants to generate excess cash so that it can increase its dividend at a healthy pace, while maintaining a top-tier balance sheet. That will also give it the flexibility to acquire more high-quality drillable acreage as well as buy back stock when that makes sense.
Thomas noted that "our goal of double-digit returns, double-digit growth, and free cash flow puts EOG in line with the best companies across all sectors in the market." That desire to be one of the best, not only in the oil patch but also the entire market, is what makes EOG Resources one of that top oil stocks to buy right now.
King of midstream energy
Travis Hoium (Kinder Morgan): Oil and gas wouldn't be worth much without the infrastructure to get the commodities from oilfields to refineries and the customers that consume them. That's where pipeline companies like Kinder Morgan come in, transporting energy across the country and collecting a toll on the ever-growing consumption of fossil fuels.
Kinder Morgan isn't entirely insulated from the price of oil and natural gas, but it generates most of its revenue from take-or-pay and fee-based revenue models. That stabilizes cash flows as commodity prices rise and fall, which is a great feature if you're not looking for a commodity-based investment. Most of the resulting free cash flow has been returned to shareholders in the form of a dividend over the past five years, and that trend should continue.
KMI Free Cash Flow (TTM) data by YCharts
If you're looking at energy stocks but don't want to make a big bet on the price of a commodity like oil, Kinder Morgan gives you the ability to get exposure to the industry while hedging some commodity risk. If energy consumption continues to rise, the company's toll-based business model will do well, and that's why I think it's the best oil stock today.
Still high-risk, but the reward profile just got a lot better
Jason Hall (NextDecade): Since going public, LNG exporter NextDecade has seen its shares lose half of their value. And that's even after more than a 50% rebound in March:
At the lowest point, frankly, Mr. Market had it right; the company's risk profile was simply too high to make it worth investing in at the time. That's because NextDecade isn't really an LNG exporter -- at least not yet -- since it doesn't have any liquefaction and export capacity at all.
So what's changed? Earlier this year, NextDecade had lost nearly all of its momentum, and it no longer had much in its favor beyond some initial approvals and an interesting business plan. It was actually going backward, having seen its deal with a construction partner to build its LNG facility fall apart in late 2018. More recently, the momentum has shifted back in its favor, with energy giant Royal Dutch Shell signing a 20-year deal to buy 2 million tons of LNG per year from NextDecade's planned Rio Grande facility when it begins operation, and also securing a nearly 1,000-acre site to build that facility on.
NextDecade is still years from generating a single dime in sales or earnings, and it still has to attain regulatory approval and build its operations. But the deal with Shell indicates its prospects to deliver have a solid shot at success. I'm planning to open a position as soon as Foolish trading guidelines permit; risk-tolerant investors looking for big upside should consider doing the same.
10 stocks we like better than Kinder Morgan
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Jason Hall has no position in any of the stocks mentioned. Matthew DiLallo owns shares of Kinder Morgan. Travis Hoium owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. 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.
