Oil prices have been excruciatingly volatile over the past year. Just this week, crude notched its second decline of more than 20% in the past six months. That roller coaster ride is enough to turn the stomach of even the most seasoned energy investor.
One way to sidestep some of this volatility is by investing in oil stocks that have less direct exposure to crude prices. That enables these companies to generate steadier cash flow, which they tend to send back to investors via above-average dividends. Three such oil stocks are Plains All American Pipeline (NYSE: PAA), Total (NYSE: TOT), and Brookfield Infrastructure Partners (NYSE: BIP). Here's why our Motley Fool contributors think they're among the top options to buy right now.
Perfectly placed in the Permian
Matt DiLallo (Plains All American Pipeline): Oil producers are growing their production out of the Permian Basin at breakneck speed. That's driving the need for investments in new oil pipelines and related infrastructure to move all that crude to refineries and export terminals along the Gulf Coast. Among the biggest beneficiaries of the Permian's boom is oil pipeline MLP Plains All American Pipeline, which has been building new infrastructure as fast as it can.
The company's recent investments set it up to grow cash flow by about 11% from 2018. Meanwhile, Plains All American currently expects to invest at least another $1.35 billion on expansion projects this year. The MLP has earmarked the bulk of that spending toward Permian-focused projects, including a large-scale oil pipeline to support the growth of ExxonMobil. As these assets enter service through the next couple of years, they'll provide the company with incremental cash flow.
Plains All American expects to use some of this growing cash flow to increase its distribution to investors. It's aiming to expand its already 6.3%-yielding payout at about a 5% annual clip in the near term. It will allocate the rest of the money to continue strengthening its much-improved balance sheet and invest in more high-return expansion projects. The company should have plenty of investment opportunities, given its focus on the fast-growing Permian.
Plains All American Pipeline's combination of growth, income, and an improving financial profile could provide it with the fuel to outperform the market over the coming years. That income with upside makes it a great oil stock to buy these days.
The big oil stock with a renewable twist
Travis Hoium (Total): Large oil companies are sitting in a strange place in the market today, attempting to grow their core fossil fuel business while finding ways to invest in next-generation energy assets. Total has, arguably, found the best strategy among big oil companies, owning large stakes in renewable energy companies like SunPower while buying wind and solar assets and investing in new gas services like LNG.
In the first quarter of 2019, the integrated gas, renewables, and power segment (iGRP) generated revenue of $7.05 billion and operating income of $529 million, up from $4.83 billion in revenue and $331 million of operating income a year ago. A big piece of that growth was LNG, which has grown as a traded commodity around the world.
About 89% of Total's revenue still comes from traditional oil and gas services, so this is still an oil stock at its core. But with countries around the world putting pressure on emissions, it's important to think about what a company will look like decades down the road. Total is already investing in new technologies that could drive its growth for decades to come. That's why it's my top big-oil stock today. And with a 5.4% dividend yield, it has a lot to like for energy and dividend investors alike.
A diversified way to gain exposure to the best part of the oil business
Jason Hall (Brookfield Infrastructure Partners): While my two colleagues offer up two relative pure plays on the oil and gas industry, Brookfield Infrastructure also owns transportation, data, and electric utility assets.
But if there's a segment of the business that management has made a big priority in expanding in recent years, it's natural gas. Over that period, the company has spent billions to acquire natural gas transmission, gathering, and utility assets. The partnership now owns 16,500 kilometers of natural gas pipelines and 600 billion cubic feet of natural gas storage capacity, and it touts more than 2,000 kilometers of regulated natural gas pipelines as part of its utility business.
Funds from operations (FFO) in its energy segment surged 62% last quarter, and that's with two acquisitions it just closed not really adding any cash flows in the quarter. Its oil and gas assets generated over 26% of FFO in the quarter, up from about 20% last year and a clear sign that management sees this as a real growth opportunity for the infrastructure asset manager.
Lastly, Brookfield Infrastructure continues to represent great value. The unit price is up about 11% over the past year, but after completing ongoing acquisitions, it should generate FFO per share at least 20% higher. In other words, it trades for about a 10% discount to its future cash flows versus the year-ago valuation, making it a real bargain in my book. Add in a 4.7% dividend and a record of double-digit payout growth, and Brookfield Infrastructure is one of the smartest and lowest-risk ways to gain exposure to -- and profits from -- the oil industry.
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Jason Hall owns shares of Brookfield Infrastructure Partners and SunPower. Matthew DiLallo owns shares of Brookfield Infrastructure Partners. Travis Hoium owns shares of SunPower. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.