2 really cheap oil stocks to buy right now

WWith the energy sector vastly outperforming the overall market this year as oil prices have rebounded as quickly as they collapsed in 2020, some investors feel they have missed the bus. This is not necessarily the case, because if you dig deeper into energy stocks, especially oil and gas stocks, you can still find hidden gems that are undervalued and have huge upside potential. Here are two of those cheap oil stocks that you’ll want to look into right away.

Two charts reveal the golden opportunity

Oil and gas companies are killing off this year thanks to rising oil prices. However, something unusual is happening that we haven’t seen in previous rounds of oil upgrading.

The oil industry is very competitive, and when oil prices rise, it is not uncommon for some upstream oil and gas companies to aggressively increase their capacity and production to make the most of strong end markets. This ends up putting pressure on supply and prices, much to the dismay of the industry.

This time around, most oil producers are on the same page and have adopted a common strategy: to limit capital spending and production, and instead use additional cash flow to strengthen their financial position. and reward shareholders with significant dividend increases. The strategy, unsurprisingly, works remarkably well in favor of oil companies and their shareholders for two reasons.

Image source: Getty Images.

First, with the stagnation of production in the US oil industry, crude oil inventories are depleting although demand remains strong. This is one of the main reasons that oil prices are holding up despite weak economic data from China and why most oil producers have now recorded at least two good quarters in a row. Better yet, demand for oil and gas is expected to increase further as we enter seasonally strong winter months.

Second, rising oil prices have caused free cash flow (FCF) to skyrocket, and companies are handing out large dividend increases, pushing stock prices higher. It’s a win-win for shareholders.

Two oil stocks, however, are not very popular in the market, although they generate higher free cash flow today than they have in years. It is important to note that the cash flow to both Marathon Oil (NYSE: MRO) and Enterprise Product Partners (NYSE: EPD) go even higher !.

MRO chart

MRO data by YCharts

Marathon Oil has already increased its quarterly dividend twice this year, first by 33% in the first quarter and then by 25% in the second quarter. There are three important numbers to keep in mind about Marathon Oil:

  • Oil price of $ 35 per barrel: that’s all Marathon Oil needs to generate enough FCF to fund its maintenance capital expenditure while keeping production at last year’s level.
  • 40%: With an oil price of $ 60 per barrel, Marathon Oil aims to return shareholders at least 40% of cash from operations each year, or more than $ 1 billion.
  • $ 4 billion: This is the total amount of long-term debt that Marathon Oil could complete in 2021 with – its lowest level of debt in almost a decade.

Marathon Oil’s financial strength is unmistakable, and it is clearly poised to generate significant sums of money given its low oil break-even point of $ 35 per barrel, much of which is expected to end up in the bottom line. pockets of shareholders. Still, the stock is trading well below its five-year average price-to-cash flow ratio of 5.9 times, making it a great stock to buy.

Enterprise Products Partners is also trading at a price-to-cash flow ratio of about 7 times its five-year average of 10.4 despite surging cash flow. In fact, if you look at this chart closely, you’ll notice that the company’s cash flow is at 10-year highs, but the stock is still available for almost half of its all-time high of 2014!

EPD Chart

EPD data by YCharts

An important metric that reflects the strength of Enterprise Products Partners’ cash flows – and more importantly, their consistency and resilience – is its distribution coverage ratio, or the number of times the company’s cash flows Master LP can cover its distribution (or dividends) during a specified period. 2020 has been a historically difficult year for the oil industry, but Enterprise Products Partners generated enough distributable cash flow to cover its distribution 1.6 times.

The trend continues, and this is just one of the reasons Enterprise Products Partners currently ranks among the best and safest energy dividend stocks. The business stores, processes and transports natural gas, natural gas liquids and crude oil, so it should have a busy season as winter approaches. Its capital spending is also expected to decline in the future, which means its cash flow is expected to remain strong, as is its dividend yield.

Right now, Enterprise Products Partners is reporting a hefty 8%, and it’s supported by dividend growth. But the stock has fallen nearly 11% since mid-June even as oil prices remain firm. My recommendation: buy this top dividend, high yielding stock while it’s still cheap.

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Neha Chamaria does not have a position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. 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.

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Felix J. Dixon