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3 Top Oil Stocks to Buy in March

John Bromels, Rich Smith, and Tyler Crowe, The Motley Fool

The oil industry has been on a roller coaster for the last five years as oil prices have crashed, stabilized, rebounded, crashed again, and...well, you get the idea. This has made some investors nervous about getting into the oil sector, but there are still some excellent values despite industry volatility.

We asked three of our Motley Fool contributors what oil stocks are their top picks for this month, and they came back with Apache Corporation (NYSE: APA) , Continental Resources (NYSE: CLR) , and MPLX LP (NYSE: MPLX) . Here's why they think they're worth a look.

A row of oil pumps

The best oil stocks can bring big growth to your portfolio. Image source: Getty Images.

Capitalizing on rising prices

John Bromels (Apache Corporation): Things were looking pretty grim for independent oil and gas exploration and production companies at the end of 2018. Oil prices had been sliding for three straight months, and nervous investors were worrying whether we were about to see a repeat of 2014, when a sharp drop in prices caused years of havoc for the entire industry.

But 2019 -- so far -- has been a completely different story. Oil prices have rebounded, with the spot price for Brent Crude up 23.3% and WTI Crude spot prices up 27.6%. WTI Crude is closing in on $60 a barrel, which is great news for producers in the Permian Basin, like oil and gas driller Apache.

Apache's Permian Basin production has been expanding rapidly as it ramps up production at its Alpine High play in West Texas. In Q4 2018 , it achieved production of 99,000 barrels of oil equivalent per day, exceeding its guidance. That helped the company's total annual production increase by 13% over 2017's total.

More oil and gas production is fantastic, and when it coincides with higher oil and gas prices, investors really stand to benefit. The market has taken notice, too, though, sending Apache's stock 32.8% higher so far this year. But I don't think that makes Apache overvalued...at least not yet. Apache's shares were hit harder than most of its peers' during the oil price downturn. In fact, over the past three years, most of its peer stocks have seen gains, while Apache is still sitting on a nearly 30% loss. Still, with oil and gas prices continuing to climb, now may be an excellent time to jump on board this undervalued oil and gas producer .

After the sell-off, comes the rebound?

Rich Smith (Continental Resources): February was not kind to investors in oil and gas producer Continental Resources. On Feb. 18, Continental reported a $0.53 per share profit for the fourth quarter of 2018, missing Wall Street's guess at $0.59 per share, and missing slightly on sales as well.

Continental's stock declined 5% once trading resumed. And it's down 10% more in the weeks since, hurt by revelations that the company spent far more on capital investment, and realized far less on oil produced (averaging sales of $50.06 per barrel, versus analyst expectations of $62).

Could March be the month Continental begins to make back its losses?

I think it might be, as investors being to notice that a 15% discount to Continental's pre-earnings price opens an opportunity for profit. According to data from S&P Global Market Intelligence , Continental is looking at a likely decline in EPS to $2.11 this year. But as capital spending moderates and oil prices stabilize, Wall Street predicts the company could grow earnings 60% to $3.37 per share next year -- then nearly double that figure three years later, earning $6.01 in 2023.

Compounded over four years, this works out to a 30% earnings growth rate, which compares favorably with Continental's current P/E of 15. What's more, even valued on free cash flow (which is often an Achilles' heel for oil companies ), Continental shares look attractive at 27 times FCF.

All this, of course, depends on Continental achieving the 30% growth rate Wall Street is projecting for it. But if investors believe it can, I think the stock could begin to rebound in March.

Fast payout growth, high yield, and strong financials wrapped into one

Tyler Crowe (MPLX LP): For the most part, investing in oil and gas infrastructure means two mutually exclusive choices. Buy for high yield, or buy for faster payout growth. Rarely is there much overlap between the two because it is incredibly challenging to maintain a balance sheet while quickly growing a high-yield payout.

One of the few exceptions is MPLX. Ever since the company went public in 2012, it has been able to maintain double-digit payout growth without compromising its financials. As of the most recent quarter, MPLX reported its distribution coverage ratio in 2018 (cash that can be used to pay investors divided by total payout) was an incredibly healthy 1.36. This meant the company generated loads of cash to reinvest in the business without having to rely too heavily on the debt or equity markets for funding.

For the next year or so, management expects to slow its payout growth slightl y to pay for its massive backlog of projects under construction and to potentially acquire Andeavor Logistics . That said, the company's business is expected to grow significantly in the coming quarters, and its current distribution yield stands at 7.8%. That's a handsome payout to wait around a year or two for a return to rapid payout growth.

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John Bromels owns shares of Apache. Rich Smith has no position in any of the stocks mentioned. Tyler Crowe owns shares of MPLX LP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .