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With New Year’s right around the corner, analysts and industry observers expect the energy sector to rebound as OPEC countries agreed to extend production cuts through the end of 2018, limiting a supply glut that’s plagued oil prices since they began their steep descent in 2014. With that in mind, a handful of stocks are poised to outperform, ranging from mainstream oil majors to small-cap diamonds in the rough yielding as much as 9 percent a year.
After another tough year for the sector in 2017, here are seven of the best energy
stocks to buy for 2018 as the sector’s profits normalize.
ROYAL DUTCH SHELL
Royal Dutch Shell, one of the world’s largest integrated oil and natural gas companies, is a solid pick for energy investors seeking an established name with low volatility. The $270 billion Netherlands-based giant is also a great dividend stock, boasting a 5.9 percent yield. RDS, which managed to keep pace with the Standard & Poor’s 500 index in 2017 while U.S. rivals like Exxon Mobil Corp. (XOM) underperformed it by about 25 percent, is showing renewed confidence in its business. In November, it resumed paying its dividend in cash – it had used fractional shares for the previous two-and-a-half years – and announced a stock buyback program to boot.
This integrated oil major is on the up-and-up after initially struggling to adjust to the bear market, and while it’s not a particularly exciting pick, it’s one of the best
energy stocks to buy for 2018 for much the same reason as Royal Dutch Shell: a ravenously enticing 6 percent dividend, lower risk than smaller players, and lean operations that allow it to profit even if oil retreats to $49 or $50 a barrel. BP, which lost more than $4.2 billion in 2015, enters the year with five consecutive quarterly profits and is expected to grow earnings by 35 percent in 2018.
OASIS MIDSTREAM PARTNERS
Despite an IPO in September 2017 that attracted little attention, Oasis Midstream Partners – a master limited partnership (MLP) that has 15-year contracts for its midstream services in the Williston Basin – is a potential dividend all-star. Required distributions amount to $1.50 a year per unit (share), and OMP targets 20 percent distribution growth annually. In its first quarter as a public company, revenue jumped 62 percent and net income rocketed 71 percent higher. If OMP increases its distribution 20 percent to $1.80 per share, and assuming OMP yields 7.5 percent, shares would hit $24 by year’s end.
TALLGRASS ENERGY PARTNERS
Another of the semi-obscure picks among the best energy stocks to buy for 2018 is Tallgrass Energy Partners, an MLP with pipelines and midstream operations in the western U.S. It could be considered a contrarian pick – shares lost 7.5 percent in the first 11 months of 2017 – but it’s both cheaply valued (a forward price-earnings ratio of 11 and PEG of 0.22) and extremely
tax efficient. MLPs aren’t subject to corporate taxes, which means no double taxation. They also distribute a vast majority of earnings to unit holders in quarterly distributions, which are treated as return of capital instead of income. As for TEP’s juicy 9 percent dividend? It speaks for itself.
Further diversifying the list of 2018’s best energy stocks to buy is Valero, a Texas-based petroleum and ethanol refiner and marketer. While OMP and TEP are each mostly midstream plays that extract tolls for transporting and storing oil and gas products, VLO specializes in downstream operations, such as refining, marketing and distribution. Unlike explorers, drillers and producers, refiners thrive when
oil prices are low or falling. VLO rose 23 percent through Dec. 1, rallying in a year when crude prices were down by as much as 20 percent. A modest forward P/E of 13.6 and 3.3 percent dividend makes Valero a good portfolio hedge if oil’s recent rally doesn’t last.
Halliburton shareholders would prefer that oil prices continue rising into 2018; the oilfield services giant contracts with explorers, frackers and producers to help them locate, manage, drill and extract natural resources more efficiently. When prices rise, drillers come out of the woodwork, and Halliburton cashes in. HAL further diversifies 2018’s best energy stocks list, and can also be considered a play on the potential resurgence of fracking. Regardless, if oil prices stay in the mid-to-upper $50s, HAL stock – which saw revenue grow 42 percent in the third quarter and swung to a profit in 2017 after losing $5.76 billion the year before – should perform well.
Rounding out 2018’s list is another multinational oil major, built for the long-term and designed to profit in any environment. While 2017 wasn’t the best year for
Exxon – the stock was one of the worst performers in the Dow – if the “Dogs of the Dow” theory holds, 2018 should be a good year. Analysts are expecting EPS to be 75 percent higher in 2018 than in 2016. At $355 billion, XOM likely won’t be the biggest winner on this list in 2018, but it’s a solid portfolio anchor that every conservative energy investor should own in some form. Thirty-four years of dividend growth is also tough to find.
John Divine is an investing reporter for U.S. News & World Report, where he covers financial markets and the economy, with a focus on individual stock analysis