With the oil price having declined markedly during the course of 2014, it's been a tough period for the sector. Indeed, a number of prominent oil majors across the globe have seen their share prices fall during the course of 2014.
So, it seems as though high-quality oil stocks can be purchased for an even better price and, although the price of oil could stay at around $80 per barrel for a good while yet (especially if Saudi Arabia refuses to cut production), for long-term investors this could represent an opportune moment to invest.
With this in mind, here are my three top picks from the sector.
Woodside Petroleum Limited
Despite the falling oil price, shares in Woodside Petroleum Limited (ASX: WPL) have gained 3% during the course of 2014. That's a better performance than the ASX, which is up 2% during the same time period.
However, Woodside Petroleum could move much higher, with the company having very strong growth prospects pencilled in. Indeed, its bottom line is due to grow at an annualised rate of 15.4% over the next two years.
Although it has beaten the ASX during 2014, Woodside Petroleum still trades at a discount to the wider index, with it having a price-earnings (P/E) ratio of 12.7 (versus 15.3 for the ASX). This equates to a price-earnings to growth (PEG) ratio of just 0.82 and, as a result, Woodside Petroleum seems to offer growth at a very reasonable price.
Santos Ltd
With shares in Santos Ltd (ASX: STO) falling by 11% during 2014, many investors may be surprised to learn that the company's P/E ratio is still very high at 21.4. However, Foolish investors shouldn't be put off by such a high rating, since Santos has ultra-strong growth prospects.
Indeed, earnings are due to rise by 32.6% per annum over the next two years and, when combined with the company's P/E ratio, this equates to a PEG ratio of just 0.66. Furthermore, dividends per share are expected to be a whopping 77% higher in 2015 than they were in 2013, meaning Santos could be yielding as much as 4.1% (fully franked) next year.
This income potential, alongside clear growth prospects, makes Santos one of my top oil sector picks.
Oil Search Limited
From looking at the share price chart of Oil Search Limited (ASX: OSH) in 2014, you'd never have guessed that the oil price was under pressure. Shares in the PNG LNG operator have risen by 7% since the turn of the year – and there could be more to come.
That's because Oil Search's earnings are expected to increase from $0.17 last year, to $0.43 in the current year, and then to $0.60 next year. If met, that would equate to a bottom line that is 3.5 times bigger in 2015 than it was in 2013.
Despite this, Oil Search trades on a PEG ratio of just 0.26 and, with dividends set to grow at a similarly rapid rate, it could be yielding as much as 3% (fully franked) next year. As such, it could prove to be a top performer in 2015 and beyond.
