As national economies all over the world continue to grow, so do their need for oil, which bodes well for oil stocks in the foreseeable future. Today’s article identifies the top five oil stocks any IRA owner should consider adding in their portfolios.
RELATED: How To Invest In Oil Inside Your IRA
In this article:
- Oil Company Stocks: Producers
- Oil Company Stocks: Pipeline Companies
5 Best Oil Stocks to Buy for Your IRA
Oil Company Stocks: Producers
1. BP PLC (BP)
No doubt about it, oil continues to become more expensive. As of the week ending June 2019, the prices of oil are inching closer to its $66-per-barrel peak for the current year.
Earlier in 2019, CNBC reported on the Trump Administration’s decision to stop giving sanction waivers to importers of Iranian oil. In its report, CNBC surmised that this decision can remove up to one million barrels daily from the international market.
Based on the law of supply and demand, a decrease in supply given constant demand will push prices up. Any oil-producing company will benefit from higher oil prices, including BP.
One of the reasons why BP is on our list is because it’s considered a cheap buy with a P/E ratio of 15 times as of the end of June 2019. This is six points less than the average P/E ratio of the S&P 500 for the same period of around 21 to 22 times.
P/E Ratio Definition: The P/E or Price/Earnings Ratio is a measure that indicates general investors’ willingness to pay for a share of stock with a specific amount of earnings per share. Expressed as a multiple of the earnings per share, (e.g., 10 times earnings or 20 times earnings), a lower values means a “cheaper” price and vice-versa.
2. Encana Corp. (ECA)
Encana’s production efficiency has increased significantly in the last two years. In 2017, it jumped by 10% and in 2018, it jumped by another 10%, which put them ahead of schedule.
The company laid out a five-year plan to raise production by 60% by the end of 2021. This was hinged on oil prices staying at an average of $55 per barrel.
Because of the increases in operational efficiency, Encana’s top management has recalibrated their estimates. In particular, it now believes they can achieve the 60% production increase with a price of only $50 per barrel.
Encana projects its ROI to go up to between 10% and 15%. It’s also targeting an average compounded cash-flow growth rate of up to 25% every year.
Oil Company Stocks: Pipeline Companies
3. Enterprise Products Partners (EPD)
In 2017, the company’s top brass knew it was on the cusp of an impending explosion in the pipeline and processing facilities industry. To take advantage of this once-in-a-generation opportunity, it needed funding and appeasing of shareholders’ concerns about issuing new shares.
To do both, EPD’s management chose to minimize the growth of its dividend payout at only $0.01 per year. The logic behind the strategy was simple: minimize payouts to retain more money for funding future growth.
In the first quarter of 2019, EPD’s distributable or free cash flows increased by 18% compared to the same period in 2018. It was also able to retain as much as $665 million for capital expenditures in 2020.
By having that much cash, EPD didn’t need to borrow money nor issue new shares of stock anymore.
Because EPD’s management is quite conservative, it enjoys results that similar-sized companies haven’t even heard of. The most glaring of which is its rapid cash flow growth, which will allow it to fund future projects internally.
This makes EPD a candidate for good long-term investment portfolios, which includes IRAs.
4. Kinder Morgan, Inc. (KMI)
It’s the biggest energy infrastructure company in the United States, controlling as many as 152 terminals and up to 70 thousand miles of pipelines. But things weren’t always rosy for this company.
During the oil bearmarket in 2015 and when the credit markets tightened, the company’s stock price plunged. And because the credit markets were dry, KMI had to use a huge chunk of its cash flows to retire debts and finance its projects.
As a result, KMI had to slash its normally high dividend payments by as much as 75%! This led to a steep drop in its stocks from $44 a share to only $13 in 2016.
Since then, KMI’s stock price has rebounded. Though still far from its peak of $44 a share, its price has risen to near $21 before July.
As the company gradually started to recover its mojo, it has been increasing its dividend payouts recently. And it has no plans of stopping, with more increases planned for this year and the next.
And with a paired multibillion-dollar buyback program, it’s dividend yield has gone up to 4% with shares purchased at $20. At current prices, KMI may be considered a bargain with good prospects for increasing income in the next few years.
5. Magellan Midstream Partners, L.P. (MMP)
The company is one of the biggest players in the oil pipeline industry. Currently, it has up to 2,200 miles of crude oil pipelines and as much as 33 million barrels in crude oil storage capacity, which includes 21 million barrels for contract storage.
MMP also has six marine terminals for storing oil that can hold up to 27 million barrels. And with 1.5 million barrels of dock capacity daily, it’s in a very good position to take advantage of high demand for oil storage.
Aside from crude oil assets, MMP also has 9,700 miles of refined oil pipelines, 45 million barrels of storage space for refined oils, and 53 terminals. This is crucial for taking advantage of the very high level of U.S. refined oil exports, which are may grow even more over the next few years.
Even better, MMP enjoys one of the industry’s highest credit ratings. It also has one of the lowest levels of debt among its peers.
As a result, its dividend distributions to its shareholders continue to grow over the last 18 years. From a distribution of only $0.56 per share in 2001, dividends are estimated to be around $4.06 per share for 2019.
As demand for oil and its price continues to grow over time, so too can the prices of oil stocks. That’s why IRA investors should consider adding oil stocks, such as these, in their portfolios.
Which of these oil stocks will you invest in this year? Let us know in the comments section below.