Are These the 3 Best Investments in Energy?
May 12th 2013 9:03AM
Updated May 12th 2013 2:30PM
Even as the market hits new highs, there are still plenty of good stocks out there to invest in these days. With oil prices still rather elevated and natural gas off its recent lows, energy stocks are a great place to place your hard-earned investing dollars. That's why the following three companies -- which have above-average shareholder payouts, excellent long-term growth prospects, and solid balance sheets -- top my list of the best stocks to invest in today.
Among the large independent exploration and production companies, ConocoPhillips has the characteristics I look for in a long-term investment. The company has a steady growth plan, which will see it boost its production and margins by 3%-5% annually through 2017, with multiple opportunities to keep growing beyond that date. In addition to its exceptional growth opportunities here in the states, Conoco's operations span the globe, including positions in the Canadian oil sands, Australian natural gas exports, and European offshore oil. That diversification has helped keep the company from suffering the fate of many of its landlocked U.S.-based peers.
That's why, unlike many of those same U.S.-focused independents, ConocoPhillips has an excellent balance sheet, with $5.4 billion in cash. Further, because its operations generate substantial cash flow, it has plenty left over after reinvesting in its growth opportunities to still pay a very generous 4.25% dividend. There's a lot more to this story, but the bottom line is that ConocoPhillips is one of the best stocks you can invest in today. Finally, the following slide from a recent investor presentation really sums up ConcopPhillips' new strategy and why it tops my list:
Source: ConocoPhillips investor presentation.
Enterprise Products Partners
The growth in U.S. oil and gas production has created a massive bottleneck in takeaway capacity, which has produced tremendous growth opportunities for Enterprise. To meet those opportunities, it has spent more than $3 billion in each of the past three years. However, the company has been very disciplined in funding this growth, as evidenced by a leverage ratio that has actually been declining as the company has retained cash flow and sold lower-yielding assets to keep its leverage in check.
Looking ahead, Enterprise has $7.5 billion in growth projects under construction through 2015, with a number of opportunities further ahead. As these projects come online, the cash flow will drive additional distribution growth as the company continues to grow an already healthy 4.4% distribution. Again, like ConocoPhillips, Enterprise Products Partners is one of the very best energy stocks to invest in for the long term.
In my opinion, LINN offers investors the best the characteristics of both Conoco and Enterprise. Like Conoco it's benefiting from the tremendous growth in onshore U.S. oil and gas production. Yet like Enterprise it's structured in a more tax-efficient manner, as it's structured in a way similar to an MLP. Taken together, LINN or its affiliate LinnCo make my list as one of the best long-term energy stocks for you to invest in if you're seeking a high yield.
LINN's business is to buy up mature oil and gas properties and operate them for maximum cash flow. It hedges 100% of its production out for four to six years, which provides both safety and visibility for its distribution. LINN, which yields 8.25%, and LinnCo, which currently yields 7.5%, will see those payouts moving higher later this summer, as the companies already announced a payout increase. Further, both will be moving to monthly payments. It's hard to complain about getting paid more, and more often. Those payouts are showing no signs of drying up, as so far this year LINN has announced more than $5 billion in acquisitions and growth projects. When combined with its very solid balance sheet, LINN has plenty of firepower to keep that income growth flowing.
Foolish bottom line
You really can't go wrong with any of these names, and my money is where my mouth is, as I'm invested in all of the companies mentioned. With solid balance sheets, visible long-term growth opportunities and best-in-class income growth opportunities, all offer exceptional investment characteristics. That's why I believe these are the three best energy stocks to invest in today.
For those who want to dig a little deeper, Enterprise Products Partners is the least risky of the three, as it's not as exposed to commodity price risk. Instead, because the growing production of natural gas is flooding the North American market and resulting in low prices for natural gas, Enterprise, with its superior integrated asset base, can profit from the massive bottlenecks in takeaway capacity by taking on large-scale projects. To help investors decide whether Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand new premium research report on the company.
The article Are These the 3 Best Investments in Energy? originally appeared on Fool.com.Fool contributor Matt DiLallo owns shares of Enterprise Products Partners, ConocoPhillips, LINN Energy, and LinnCo. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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