3 Oil Stocks to Buy in February

By Tyler Crowe, Jason Hall, and Matthew DiLallo Markets Fool.com

While oil price have been hovering around the $50-$55 a barrel range for some time, some investors are likely looking to get back into energy stocks again. While many have already seen some sizable gains over the past year, there are still some companies out there worth looking at.

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We asked three of our energy contributors to each highlight an oil stock they think should be on investors' radars for February. Here's why they picked ConocoPhillips (NYSE: COP), NOW Inc. (NYSE: DNOW), and Holly Energy Partners (NYSE: HEP).

Image source: Getty Images.

A clear catalyst on the horizon

Matt DiLallo (ConocoPhillips): Leading independent oil and gas producer ConocoPhillips' primary goal during the oil market downturn was to push costs down as much as possible. The company has largely accomplished that, and as a result, it can now grow production, fund a growing dividend, and generate free cash flow at current oil prices. It is a remarkable transformation that's only just starting to bear fruit.

However, what's unique about ConocoPhillips' latest strategy is that its focus is not so much on growing production as it is about increasing shareholder returns. To achieve that aim, ConocoPhillips plans to allocate its growing cash flow toward a combination of high-return investments, increasing the dividend, buying back stock, and paying down debt. The company is already well under way with this plan, expecting to increase production 2% this year and already having announced a 6% dividend increase.

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That said, the company wants to further jump-start shareholder returns by selling $5 billion to $8 billion of lower-margin North American gas assets in the near term. It intends to use those cash proceeds to buy back as much as $3 billion of stock, with thebalance used to push debt down toward its target level. These assets sales represent a compelling near-term catalyst for the company's stock price because they should unlock hidden value, according to analysts. That's because the market does not give the company much credit for these assets at the moment given their weaker margins and lower growth prospects. However, if ConocoPhillips canrealize the full value of these assets, it could cause the market to assign this stock a much higher value.

Buy this deeply connected distributor on the right side of the industry cycle

Jason Hall(NOW Inc): I'll be the first to admit that I have no idea when oil prices will -- or indeed if they really will -- rise above the current level. But whether oil prices shoot up or not, NOW Inc is an important company that will remain relevant through the current environment and into the next part of the cycle (whenever that is).NOW Inc is one of the biggest distributors to the oil and gas industry, supplying companies in every part of the oil and gas value chain with parts, components, and accessories to keep oil and gas flowing reliably and cheaply.

The company has struggled with falling demand since it was spun out ofNational Oilwell Varcoin 2014, as oil and gas producers cut back on spending. But there's only so far its customers can stretch their existing parts and supply inventories. And we've pretty much reached the point where NOW Inc should see its revenues stabilize, if not start creeping up.

The number of onshore U.S. rigs actively working has increased 28% over the past year. Midstream companies continue to invest in infrastructure projects to connect that new drilling to the energy grid. NOW Inc has generated positive operating cash flows throughout the downturn and is in an excellent position to profit from any level of increased activity.

It's going to take some time yet for oil and gas spending to recover, but NOW Inc is in a perfect position to reap the benefits when it does happen. And if it takes a while yet, the company will continue to do just fine.

The little master limited partnership that could

Tyler Crowe (Holly Energy Partners):A lot of investors looking at energy today are probably looking for either deep value investments or growth stocks. For those few investors looking at this industry for a high-yield stock that can actually continue to pay its investors, Holly Energy Partners is worth a look.

One of the ways oil and gas pipeline companies can protect themselves from the volatility of commodity prices is to work on fee-based contracts. Holly Energy Partners takes this theory to the limit as 100% of its contracts are structured as fee-based, and many of those contracts also have minimum volume commitments that ensure even greater revenue protection. By bringing on a small but steady stream of new projects online under these kinds of contracts, Holly Energy Partners has been able to raise its payout to investors every quarter since its IPO back in 2004. That's a pretty good reputation for a 6.75% distribution yield.

It helps that Holly Energy Partners has strong support from its parent company, HollyFrontier (NYSE: HFC). While HollyFrontier may be running out of current assets to drop down to the subsidiary as of late, the company has a reputation for making strategic acquisitions at decent valuations. With the same team making capital allocation decisions at Holly Energy Partners, we can assume that future growth will be viewed under that same high-return lens that HollyFrontier has used for the rest of its business and find ways to keep this long-standing distribution increase going for much longer.

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Jason Hall owns shares of National Oilwell Varco. Matt DiLallo owns shares of ConocoPhillips and National Oilwell Varco. Tyler Crowe owns shares of National Oilwell Varco and NOW. The Motley Fool owns shares of and recommends National Oilwell Varco and NOW. The Motley Fool has a disclosure policy.