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4 Oil Stocks to Buy as Sector Spending Picks Up

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The oil and gas industry isn’t out of the woods yet, but energy companies are likely to exhibit a radical change in their approach toward spending this year. After years of combating plunging prices with cutbacks, expenditure for the sector is projected to increase over 2017. Signs are already evident, with Tuesday witnessing the announcement of additional deals based around Permian plays.

Such additional expenditure and enhanced M&A activity is likely to have a beneficial effect on stock prices for the sector as a whole. This makes this as good a time as ever to add energy stocks to your portfolio.

Companies Prepare to Boost Spending

This year hasn’t been as kind to the oil and gas sector as last year with crude futures down nearly 2%. The landmark production cap deal struck by OPEC members and other major oil exporters has made a huge difference to sentiment. However, gains have been marred by fears that certain key producers may not keep their word. Rising U.S. crude inventories have compounded the sector’s problems.

Despite these concerns, futures moved 45% higher over last year. These gains followed two years of double digit losses which hit a peak of 46% for 2014. In response, companies across the board reduced capital expenditure, resorted to layoffs and sold what they termed as non-core assets.

But the landmark OPEC deal means that exploration and production companies are preparing to complete unfinished projects and start new ones. According to Barclays (BCS - Free Report) , exploration and production companies from North America are likely to increase spending by 27%. On a global basis, expenditure is likely to go up by 7%. This is a radical departure from last year and 2015 when spending declined by 23% and 26%, respectively.  

Permian Basin Deals Heat Up

Meanwhile, M&A activity heated up for the sector on Tuesday, leading to gains for oil companies. Exxon Mobil Corp. (XOM - Free Report) announced its intention to more than double its Permian Basin resource of 6 billion barrels of oil equivalent. The company aims to achieve this through the buyout of companies owned by the Bass family of Fort Worth, TX. Alongside an upfront payment of $5.6 billion, Exxon Mobil will make a series of additional contingent cash payments of up to $1 billion. (Read: Exxon Mobil to Buy Bass Family Assets, Double Permian Yield)

Earlier this week, on Monday, Noble Energy, Inc.    entered into a definitive agreement to acquire Clayton Williams Energy, Inc. in a bid to expand its footprint in the Permian Basin. The transaction is worth $3.2 billion, post Noble Energy’s assumption of Clayton Williams’ net debt of $500 million. (Read: Noble Energy to Acquire Clayton Williams for $3.2B)

According to analysts, deals of this nature could push up the value of the group as a whole. With its relatively low break even cost, the Permian Basin is likely to attract more transactions of this nature in the near future. Also, with their new found confidence, companies could soon be venturing into other oil rich areas. The new administration has already indicated that it would likely review regulations limiting drilling activities in Alaska and in other parts of the U.S.

Our Choices

Even as energy companies prepare to step up spending over 2016 and M&A activity picks up, upcoming earnings are looking promising. Most analysts feel that a year-over-year improvement will be evident by this quarter itself.

The overall outlook for the sector has also improved significantly. Picking up stocks from the energy industry makes for an extremely prudent choice at this time. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

Each of the stocks selected have a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Archrock Partners, L.P. is a MLP which provides natural gas contract compression services primarily in the U.S.

Archrock Partners has a VGM Score of B. The company has expected earnings growth of 18.3% for the current year. Its earnings estimate for the current year has improved by 2% over the last 30 days. The stock has returned 19.1% over the last three months, outperforming the Zacks Oil And Gas - Production Pipeline – MLP sector, which has returned 2.4% over the same period.

Global Partners LP (GLP - Free Report) is a Delaware limited partnership formed by affiliates of the Slifka family. It owns, controls or has access to one of the largest terminal networks of refined petroleum products in New England.

Global Partners has a VGM Score of B. The company has expected earnings growth of 98.7% for the current year.  Its earnings estimate for the current year has improved by more than 100% over the last 30 days. The stock has returned 25.4% over the last three months, outperforming the Zacks Oil And Gas - Refining And Marketing - MLP sector, which has returned 7.4% over the same period.

Sundance Energy Australia Limited is focused on the acquisition and development of oil and gas across North America and Australia.

Sundance Energy has a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 4.71, lower than the industry average of 14.48.The stock has returned 16.5% over the last one year, outperforming the Zacks Oil And Gas - Exploration And Production – U.S. sector, which has returned 1.4% over the same period.

Plains All American Pipeline, L.P. (PAA - Free Report) is a master limited partnership (MLP), involved in the transportation, storage, terminalling and marketing of crude oil, natural gas, natural gas liquids (NGL) and refined products in the U.S. and Canada.

Plains All American Pipeline has a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. The stock has a P/E (F1) of 18.10, lower than the industry average of 18.79. The stock has lost 4.2% over the last three months, underperforming the Zacks Oil And Gas - Production Pipeline – MLP sector, which has returned 2.4% over the same period. This provides a good opportunity to buy the stock given that there is significant upside potential

Zacks' Top 10 Stocks for 2017

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?

Who wouldn't? As of early December, the 2016 Top 10 produced 5 double-digit winners including oil and natural gas giant Pioneer Natural Resources which racked up a stellar +50% gain. The new list is painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. Be among the very first to see it>>

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