Top 3 Oil Stocks to Buy in February

Energy, or more specifically oil and gas, has seen strong growth over the past year. It was the best performing sector of the market in 2021 and it has retained that crown so far in 2022. Oil and gas are notoriously cyclical though, so there is always that lingering feeling that the bottom could fall at any time. moment.

Fortunately, we invest in companies, not commodities, and sometimes a company’s individual situation can be more important than what drives the industry as a whole. While the shares of Marathon Oil (NYSE: MPC), TotalEnergies (NYSE: TTE)and earthling (NASDAQ:TELL) are likely to benefit from rising commodity prices, there is reason to believe they are poised to do well even if commodity prices do not cooperate. Here’s why investors should consider these three oil stocks this month.

Image source: Getty Images.

Too much money to ignore

Buying oil refineries certainly means investing in “old” energy which will suffer as we move away from oil. That’s a fair criticism of any oil company today, but it also doesn’t give much credence to a company’s ability to change. With significant renewable diesel investments underway and over $10 billion in cash on the books, Marathon Petroleum has plenty of options to both transform the portfolio and reward shareholders along the way.

Much of that cash comes from the sale of Speedway, its marketing and retail division. Management estimates the after-tax proceeds from the sale were $17.2 billion. So far, it has used $5.5 billion of it to buy back shares. According to its latest quarterly results, the board authorized additional buybacks of $9.5 billion. Think about it for a minute. It is a $49 billion company that has already purchased more than 11% of its market capitalization in share buybacks and has the power to buy back another 19% at its current price.

Additionally, Marathon is taking long-term steps that should give investors confidence in its ability to manage the transition from fossil fuels. It has just completed the conversion of a refinery to a 184 million gallon per year renewable diesel facility, and it has begun the conversion of a second facility which will produce 730 million gallons per year. The addition of these two facilities will bring Marathon’s renewable energy processing capacity to 1.5 billion gallons per year.

To put an icing on the cake, Marathon shares look awfully cheap. Its price-to-book ratio of 1.7 is one of the lowest valuations we’ve seen for this stock this decade. The combination of a huge shareholder rewards program, a realistic and affordable energy transition plan and a very cheap valuation makes Marathon shares a compelling buy.

The right strategy at the right time

When it comes to looking for a fossil fuel company with a clear plan to transition to other energy sources, few have a better strategy in place than TotalEnergies. The plan is quite simple, manage the oil portfolio to maintain production and maximize cash flow, grow the natural gas and liquefied natural gas (LNG) business in the short to medium term, and invest in energy alternatives at all levels – solar, wind, hydrogen, storage, carbon capture – to eventually move away from fossil fuels.

To be fair to others, TotalEnergies is not the only one using this plan. What is unique about this strategy, however, is that it also entails considerable returns for investors along the way. Its upstream operating costs per barrel of oil are the lowest of the integrated oil and gas giants, putting it in pole position to invest heavily in portfolio transition while returning mountains of cash to investors. In 2021, the company has generated enough cash to invest $13.3 billion in the business, reduce total outstanding debt by $6 billion, pay out $8.2 billion in dividends, and still have enough cash for $1.5 billion in share buybacks. With oil and gas prices significantly higher so far in 2022 than at the start of 2021, management is already forecasting $2 billion in share buybacks in the first six months of the year on top of its recent 5% increase in the dividend.

Even though TotalEnergies has, arguably, the best transition plan in place among the big oil companies and is throwing handfuls of cash, the company’s stock remains one of the cheapest of its peers. Its price-to-book ratio of 1.41 is well below those of ExxonMobil (2.05) and Chevron (1.91). With a dividend yield of 5.22% to boot, shares of TotalEnergies seem hard to pass up at the moment.

A stunning investment that could also transform a portfolio

Let’s start by making one thing clear: Tellurian is truly an all-or-nothing investment that has been extremely frustrating to own for the past few years. The company has been telling investors for some years that it intends to begin construction of its liquefied natural gas (LNG) export terminal. Those plans, however, continued to be put on hold as he struggled to find funding for the expensive venture.

Despite operational setbacks and the fact that its initial financing plan has not materialized, Tellurian’s underlying thesis is still there: global demand for LNG is still rising sharply, and Tellurian has one of the few loans to start projects. Although he was unable to find financial partners who would own part of the facility and the LNG shipments it produces, he found a sufficient number of gas buyers to ensure that, if built, there is a strong demand in place.

Financing a multi-billion dollar LNG export facility is not easy. It’s even harder when you’re a startup and not a deep-pocketed oil and gas company with other money-making assets while you build. This is not the first management rodeo, however, as executive chairman Charif Souki was at the helm of Cheniere Energy when it built and financed its first LNG facility years ago.

It is entirely possible that not everything will go to plan and that Tellurian may not be able to obtain sufficient financing or may have to take on so much capital that it significantly dilute the stake of existing shareholders. If he can build that LNG without sacrificing too much investor capital, it could be an incredible return for investors. At the current share price, this looks like a risk worth taking.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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Felix J. Dixon