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3 Top Energy Stocks to Buy in November

Even as the stock market steadily breaks records and continues to go up month after month, there's a sector with some great bargains to be found: energy. The catch? There are also plenty of stocks that have been beaten down, but may not be worth buying, either. 

We asked three of our top energy-industry experts to help us figure out what's worth buying right now. They came up with two of the biggest cash cow oil and gas distribution and logistics companies, Kinder Morgan Inc (NYSE: KMI) and Enterprise Products Partners L.P. (NYSE: EPD), and a well-capitalized, crazy-cheap offshore driller, ENSCO PLC (NYSE: ESV). Keep reading to learn what makes these three energy stocks worth buying right now. 

Image source: Getty Images.

A screaming bargain

Matt DiLallo (Kinder Morgan): Natural gas-pipeline giant Kinder Morgan is just too cheap to ignore these days. The company, which owns a vast portfolio of fee-generating pipelines and storage terminals, expects to produce $1.99 per share in distributable cash flow this year (DCF), which is a fancy phrase for the excess cash it generates. At its current sub-$18 stock price, it sells for less than nine times free cash flow, which is absurdly cheap for a stable pipeline stock, since many peers trade at a mid-teens multiple of DCF.

Image source: Getty Images.

Kinder Morgan's dirt cheap price comes even though the company has made tremendous strides in shoring up its balance sheet and locking up funding for growth projects. The company has completed a flurry of moves since the end of 2015, which have combined to lop off $5.8 billion of debt from its balance sheet. Further, these transactions have secured the financing so that the company can fully fund its current slate of $12 billion in high-returns expansion projects, while only consuming less than 50% of its DCF each year.

Because of that, Kinder Morgan plans to ramp-up cash returns to investors next year, with its plan to boost the dividend 60%. At that rate, investors who buy today can lock in a 4.5% yield for 2018.

Meanwhile, that payout should grow by 25% in 2019 and 2020, fully supported by the company's excess cash and in-process growth projects. That's a tremendous growth rate for such a cheap stock, which is why Kinder Morgan looks like an excellent buy this month.

A 6.7% yield never looked so good

Tyler Crowe (Enterprise Product Partners): Whenever a stock has a dividend yield north of 6%, every investor should be on high alert because it could be a yield trap -- a stock with an enticing dividend yield that's ultimately on a decline that will lead to a payout cut. Right now, Enterprise Products Partners' distribution yield stands at 6.8%. (It's a master limited partnership, so it pays a distribution instead of a dividend.) Unlike many companies with a yield that high, Enterprise's high yield looks more secure than ever.

Image source: Getty Images.

Enterprise is an excellent income investment. It has a stable revenue that's protected by fixed-fee contracts that also have minimum-volume clauses, which means that Enterprise's vast network of Natural Gas Liquids' pipelines and processing facilities always have work to do and aren't subject to much commodity-price risk.

Recently, though, management decided to moderate the growth of its payout to shareholders. That decision wasn't because it's facing fewer growth opportunities, but because it has so many growth opportunities that it wants to retain more cash over time to fund them. Management estimates that its new dividend growth program -- a $0.0025 per-share increase every quarter -- will allow the company to fund its growth with modest debt increases and retained cash flow rather than issuing equity. 

The larger that retained cash flow pile becomes, the more sustainable Enterprise's payout becomes. While investors may not like the slower growth rate today, it's hard to find a high-yield investment with such a lucrative long-term prospect. 

This offshore driller is dirt cheap and built to last

Jason Hall: (ENSCO PLC): Offshore drillers operate at the whims of oil producers, and with the exception of long-term contracts signed before the oil downturn started in full force, far more vessels have come off contract than new contracts awarded. This has seen the industry shrink significantly, with many of the oldest, least-competitive drilling vessels scrapped in the past couple of years. It's been so bad that even many newer vessels have been idled to cut costs. 

Image source: Getty Images.

But even as the industry continues to struggle with a slow recovery, there are opportunities for patient investors. One of my favorites is Ensco, which just recently acquired Atwood Oceanics, adding to its high-spec fleet, which should prove to be a big advantage when offshore spending recovers. And there are signs the recovery is starting.

CEO Carl Trowell pointed out recently that new floating-drillship contracts have increased for five quarters in a row, and those contracts are starting to stretch over longer periods. That's a great sign for Ensco, which announced it was awarded four new contracts last quarter, and has been awarded more this year than any other driller. 

Even if it takes some time for offshore drillers to more fully recover, Ensco is positioned to ride it out, with $3.2 billion in contracted backlog, $1 billion in cash and investments, and $2 billion available on its credit revolver. Furthermore, the company has no debt maturing in the next two years and only $1 billion due by 2024. 

Not only is Ensco set to ride out the downturn, it trades for one-third book value. That's an incredible risk-reward opportunity. At current prices, Ensco could look like a steal in a few years.

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Jason Hall owns shares of Ensco and Kinder Morgan. Matthew DiLallo owns shares of Enterprise Products Partners and Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. Tyler Crowe owns shares of Enterprise Products Partners. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool owns shares of Ensco. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.