3 Top Oil Stocks to Buy in February

Oil prices appear to have stabilized above $50 a barrel. That's been good news for many of the industry's largest players, including Royal Dutch Shell plc (NYSE: RDS-B), which is deftly executing its growth strategy. However, all oil companies aren't doing quite as well, notably ExxonMobil Corporation (NYSE: XOM). But Exxon's laggard showing could present a buying opportunity, as well, if you have a value bent. That said, if you don't like the idea of relying on often volatile oil prices, then maybe a refiner like Marathon Petroleum Corp (NYSE: MPC) will be more to your liking.

Here are some quick takes on what you need to know about this trio of top oil stocks to buy in February, spanning a wide range of investment opportunities.

Firing on all cylinders

Tyler Crowe (Royal Dutch Shell): One of the things Shell CEO Ben van Beurden outlined in his plan to transform the company into a more profitable business was making every single one of its operating segments into cash-generating engines to fuel capital spending and shareholder returns. At the outset, this plan entailed generating $20 billion to $25 billion annually from 2019 to 2021 that would go toward debt reduction, dividends, and share repurchases. Originally, this plan looked incredibly ambitious as the company only generated about $5 billion in free cash flow per year from 2013-2015, when oil prices were above $90 a barrel, and it took on a lot of debt to pay for its acquisition of BG Group.

What's surprising is that not only is this plan coming to fruition, but it's exceeding management's expectations. Because of its success in reducing costs and optimizing its portfolio, management now expects Shell to generate $30 billion to $35 billion in free cash flow annually over that same 2019-2021 time period, with the price of Brent crude at $60 a barrel (and you can expect to add $6 billion to that for every $10 per barrel change in price). That is a lot of cash it can use to reward shareholders, or even ramp up its spending in its renewable energy platform it wants to grow significantly over the next decade.

Shell is showing it is one of the better positioned integrated oil and gas players over the next several years, and investors can still buy shares at a reasonable price that gives a dividend yield of 5.8%. That's quite a value proposition for any investor looking at the oil industry today.

The giant misses

Reuben Gregg Brewer (ExxonMobil Corporation): Exxon's integrated business spans from oil drilling to refining. This is important right now because oil prices have rebounded, and drillers like ConocoPhillips are putting up investor-pleasing earnings. But higher oil prices increase costs in Exxon's refining businesses, which is part of the reason the company missed recent earnings expectations.

Note, however, that the energy downturn led to a dividend cut at drilling-focused ConocoPhillips, and a stagnant dividend at Shell, while a more balanced and diversified Exxon continued rewarding investors with hikes. It looks like investors are punishing Exxon for the very aspect of its business model that helped it survive the oil downturn in stride.

Another big issue is that Exxon pumped 2% less oil in 2017 than it did in 2016. Less oil means less revenue, another fact that contributed to its earnings miss. But the bigger concern is that Exxon's upstream business isn't growing. This is likely to be temporary since Exxon has big projects in the works, including the company's sixth major discovery in offshore Guyana, among other promising developments. Exxon also is also planing a major production increase in its onshore U.S. business. The production issue should be resolved in time.

The real takeaway is that every year won't be great for Exxon, but its balanced and conservative approach leads to solid long-term results -- like 35 years of annual dividend increases. Today, you can buy Exxon with a robust 4% yield and at a near 10-year low in its price to tangible book value. That's worth a deep dive if slow and steady is your desired investing pace.

Downstream is the best oil play

Travis Hoium (Marathon Petroleum): There aren't a lot of oil companies making a profit in the oil drilling business these days, at least on a GAAP basis, which makes this a tough industry for investors. That's why I'm looking further downstream at Marathon Petroleum, mainly because it's not making bets on where oil can be found, but rather it's refining and delivering oil to customers. As a result, the fluctuations of oil prices on a regular basis are less impactful to the business.

You can see that bottom-line profits have been fairly steady, by oil industry standards, and Marathon Petroleum is benefiting from a slight uptick in U.S. oil consumption. That's because the company basically takes a small chunk of the revenue from the oil flowing through its business, no matter the underlying price of oil.

The reason I think Marathon Petroleum is a better buy than oil drillers or equipment companies is that I don't see oil prices staying where they are long term. Electric vehicles are rapidly taking share in the market, and since oil is priced on the marginal barrel (or the last barrel produced), we could see prices plunge with just a small decline in consumption. If that happens, oil producers will be sunk, but Marathon Petroleum is less dependent on the marginal barrel and more dependent on the volume of barrels consumed overall.

While EVs may lead to a small reduction in oil demand in the next few years, affecting the marginal price of oil, I don't see overall oil consumption plunging, and that will keep Marathon Petroleum's revenue and earnings strong, which is why it's my top oil stock for February.

Opportunities abound

Although Shell, Exxon, and Marathon present very different investment opportunities, they each provide a unique way to buy into the oil business in February. Shell is a turnaround story that's bearing fruit, Exxon is the industry stalwart that appears to be temporarily lagging its peers, and Marathon shifts the picture from oil prices to energy demand. Take some time to get to know this trio, and you might discover that one of them has a place in your portfolio.

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Reuben Gregg Brewer owns shares of ExxonMobil. Travis Hoium has no position in any of the stocks mentioned. Tyler Crowe owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.