We’ve counseled readers repeatedly over the last two years not to rely on high oil prices staying high.

Investment booms never end well, though commodity busts certainly can for those bold and lucky enough to get the timing right.

For the moment, we’re making do with continuing outperformance relative to the hard-hit energy sector and a recent track record of skepticism that’s proven entirely warranted.

In February — about half way through the last crude rally, as it turned out — we warned in an article headlined “The Coast Isn’t Clear” that it would take more time than the bulls were likely counting on for U.S. output to slow and for rising demand to dissipate the even faster growing stockpiles glut.         

Then, in late April, with prices just about to peak, I penned “Cheap Money In, Smart Money Waiting,” contrasting continuing market speculation on higher oil and equity prices with doubts about the durability of the rebound, voiced by some of the most experienced investors and best-informed executives.

Those alarms have proven to be on the money, which unfortunately can’t be said for the first-half performance of our Best Buys. That was hurt by  the sector’s overall weakness and our unshaken – but  also recently unrewarded — faith in the long-term value proposition of the largest midstream processors with healthy yields and plenty of income protection against a spell of low prices.

Those companies and MLPs look like even bigger bargains now in the wake of the recent discounting, the more so given the likelihood of higher energy prices in the long run and the many competitive advantages of the U.S. energy industry.

So the updated Best Buys list we’re unveiling today features many of the familiar midstream names, albeit down the pecking order a bit in a reflection of their current disfavor and shrunken near-term horizons.

Continuing to climb up the charts are the refiners and tanker operators that have done so much of late to buoy our overall performance, and for whom the current market fundamentals amount to a license to print money.

As for the upstream, only two drillers made the list this time, both focused on natural gas production in the prolific Marcellus basin. It will take time for crude to work off the current supply and stockpiles gluts, and the stocks of oil producers and their suppliers still pose significant downside risk while offering very limited near-term upside, we believe.

U.S. natural gas is much more of a bargain currently relative to crude as well as natgas prices overseas, and has significant and unpredictable upside based not only on weather but the continuing development of domestic petrochemical projects, liquefied natural gas export terminals and new pipelines to Mexico.

We’ve chosen the two producers best placed to weather the current slump and to profit from the higher prices that will likely arrive much sooner than most expect.

One reason natural gas output has grown as much as it has is the associated gas produced by shale drillers seeking out crude. As output of gas as well as oil from the Bakken and the Eagle Ford inevitably slows amid insufficient crude prices, the Marcellus gas producers should benefit.

On to the new Best Buys.

1. Marathon Petroleum (NYSE: MPC)

The Midwestern and Gulf Coast crude refiner is already benefiting from some of the strongest refining margins in years, as the persistent glut of cheap domestic crude further stimulates resurgent demand for gasoline and diesel. Now it’s using the expensive equity of its refinery logistics MLP in a steal of a merger between that affiliate with MarkWest Energy Partners (NYSE: MWE), a leading Marcellus midstream processor. That deal not only delivers significant product diversification but will also dramatically increase the cash flow to MPC as the MLP’s general partner in the coming years. Neither benefit appears to have been priced in; in fact MPC may not even be getting full credit for its current refining bonanza. Buy Growth recommendation MPC below $70.

2. Valero (NYSE: VLO)

The largest and most geographically diversified U.S. refiner is riding the same industry tailwinds as Marathon, while developing two general partner income streams from separate MLPs providing cheap capital to its logistics and fuel distribution offshoots. The risk with Valero, as with all U.S. refiners, is that this is a highly cyclical sector that will suffer should crude prices rise enough to hurt demand and take a big bite out of the currently fat refining margins. But this seems unlikely any time soon, and in the meantime the diversification into logistics and retailing likely warrants a higher long-term multiple on the refiner’s earnings. Buy Growth recommendation VLO below the increased limit of $77.

3. Energy Transfer Equity (NYSE: ETE)

The fast-growing MLP at the head of what is now a huge and very successful midstream family has benefited from adept acquisitions and intramural deal making that’s left it with much of the long-term upside from growth at affiliated partnerships. Rival Williams (WMB) has so far resisted ETE’s merger offer, but with midstream assets in a deep slump founder Kelcy Warren won’t suffer from a shortage of alternative targets. ETE has just increased its distribution 39% year-over-year while its main affiliate, Energy Transfer Partners (NYSE: ETP), is offering an 8.2% yield and 8% annualized distribution growth despite the drain of ETE’s incentives. Buy Growth recommendation ETE below $75.

4. SunEdison (NYSE: SUNE)

The leading solar power developer has turning itself into a general partner very much along the lines of Energy Transfer Equity, only its affiliates are known as yieldcos rather than MLPs and shielded from income tax by accelerated depreciation benefits rather than a codified exemption. The share price has tumbled in the last week following SunEdison’s latest acquisition, this time of solar panels marketer Vivint Solar (NYSE: VSLR). But like the prior deals this one will speed up the distribution growth at affiliate TerraForm Power (NASDAQ: TERP) and thereby the flow of related incentives to SunEdison. The continuing improvement of alternative energy technologies promises to maintain the rapid growth of solar and wind power at the expense of hydrocarbon-based fuels. As the leading provider of yield harvested from such technologies, SunEdison has a long growth runway ahead of it. Buy Aggressive recommendation SUNE below the increased limit of $32.

5. Western Refining (NYSE: WNR)

Western is the smallest of the three refiners on this list but benefits from the same bullish market fundamentals as the others while profiting from its own pair of MLP affiliates. Shareholder friendly management returned more than 10% of the market cap to investors last year, primarily via a special dividend. Buy Aggressive recommendation WNR below $57.

6. UGI (NYSE: UGI)

Once primarily an eastern Pennsylvania gas distribution utility with an unbroken string of dividend payments stretching back to 1885, the company has lately diversified into midstream merchant services to take advantage of the overlap between its turf and the Marcellus shale. As such, it has tackled the development of new gas pipelines for producers and the construction of small-scale liquefied natural gas plants designed to expensively satisfy the peak demand from nearby power plants. The third major prong in UGI’s business strategy is propane distribution via its many recently purchased subsidiaries across Europe and in the U.S. under the brand of its affiliated AmeriGas Partners (NYSE: APU) MLP. With propane on clearance sale this summer, distributors should find plenty of room to ratchet up their margins, something AmeriGas has done in a variety of commodity environments. Buy Conservative recommendation UGI below $45.

7. EQT (NYSE: EQT)

A leading Marcellus driller with extensive holdings in the basin’s liquids-rich sweet spot, EQT has seen its realized price premium shrink alongside the price of natural gas liquids. Yet it continues to rapidly ramp up production, making up some of the price pain on volume. Like all the recommendations above it EQT is also an enthusiastic developer of affiliated income vehicles, spinning out first its midstream operations and then its general partner interests in those as separate securities. With domestic natural gas prices poised to increase over the medium term, perhaps sharply, EQT will be a major beneficiary, not least because its midstream MLP is getting an increasing share of its pipeline traffic from other nearby producers. Buy Growth recommendation EQT below $99.

8. Magellan Midstream Partners (NYSE: MMP)

The leading shipper of refined fuels got 68% of its cash flow last year from this steady, long-term business with built-in fee increases tied to inflation. Crude pipelines linking major Texas producers with demand centers delivered another 23% of the cash, much of it also tied to multi-year contracts with fixed commitments. In all, Magellan says only some 15% of its business has commodity exposure. It yields 4.3% based on a distribution recently increased 16% year-over-year, and is committed to increasing its payouts at a comparable pace over the next few years. As the owner of its general partner, Magellan doesn’t have to pay out GP incentives like MLPs run by corporate sponsors. Buy Conservative recommendation MMP below $90.

9. Enterprise Products Partners (NYSE: EPD)

The largest and most conservatively managed MLP, Enterprise has been badly hurt of late by its very size amid widespread midstream selling, as well as by its limited exposure to the slumping price of natural gas liquids. But its NGL pipelines, fractionators and port terminals along the Gulf Coast would be impossible to replicate, and it’s the essential midstream processor many drillers simply couldn’t do without. The yield is now up to 5.5%, and though it’s growing more slowly than the distributions of the most comparable rivals it’s also covered by the cash flow with plenty left over, so that the yield and the growth can be maintained even if the slump lasts years.  Buy Conservative recommendation EPD below $42.50.

10. Delek Logistics Partners (NYSE: DKL)

The logistics affiliate of a small but fast-growing southern refiner, DKL is benefiting from the strong refining fundamentals while developing several new pipeline projects on its increasingly popular turf. Delek’s recent acquisition of a majority stake in another small refiner with logistics assets could boost growth further. In the meantime, the yield backed mostly by long-term contracts with DKL’s sponsor is up to  5.5%, and DKL plans annual increases of 15% or more for the foreseeable future. Buy Conservative recommendation DKL below the increased target of $52.

11. DHT Holdings (NYSE: DHT)

Our favorite oil tanker play is, like the rest of the energy shipping sector, benefiting from revitalized demand after years of overcapacity and heavy ship owner losses. Tankers are saving a bundle on the cheaper bunker fuel, while profiting from the fact that a lot of the Atlantic basin’s surplus crude now is making lengthy journeys to Asia, displaced from U.S. shores by shale production. They’re also increasingly in demand for offshore storage. DHT is benefiting from a well-timed acquisition of tankers shortly before charter rates shot up, and has increased its dividend to yield a projected 7.2%, with cash flow sufficient for a double-digit payout. Tanker stocks have lagged well behind increases in charter rates so far this year, but that could change in a hurry. Buy Aggressive recommendation DHT below $10.

12. EuroNav (NYSE: EURN)

One of the largest oil tanker fleet operators in the world, EuroNav is riding the same bullish charter market fundamentals as DHT, with the added draw of promising to pay out 80% of net annual after-tax income as dividends. Based on the first quarter’s distribution and the current share price that policy could deliver a double-digit yield this year. Buy Aggressive recommendation EURN below $18.

13. Cabot Oil & Gas (NYSE: COG)

The leading natural gas driller in the dry gas Marcellus sweet spot in northeast Pennsylvania and among the lowest cost producers anywhere, Cabot is relatively well protected from low crude prices and exposed to considerable upside once natural gas prices lift. Its realized prices should also improve over the next year as additional pipelines give its gas greater access to the higher-value Northeast markets. Cabot’s attractive assets and relatively low debt could also make it an acquisition target. Buy Growth recommendation COG below $35.

Related Links:

We covered the improved refining outlook in a recent Energy Letter (“Refiners Beating Slump”), which also analyzed the advantages accruing from the MarkWest merger to Marathon Petroleum. See “Valero Still the One” for an overview of the sector’s valuation metrics and “Cooking With Cheap Crude” for an earlier take on the refining industry’s attractions.

The rationale for owning Magellan and UGI was laid out in “Never Mind the Oil Prices,” while “Profiting From the Pain in Propane” looked at the effects of the NGL slump on UGI as well as Enterprise Products Partners.   

EuroNav and DHT were profiled a month ago in “New Targets on High Seas.” Energy Transfer’s pursuit of Williams was the subject of “Williams on Menu at Energy Transfer” in the same issue, which also updated SunEdison’s progress (“SunEdison Breezing Right Along.”)

EQT’s midstream growth was noted in “Making It Up on Volume” in April, while its spinoff of its general partner interest in the midstream business was detailed in “Getting Behind EQT GP Holdings,” the portfolio update at the bottom of the May 12 Energy Letter.

For more on Delek Logistics see “Two Healthy Yields Not Tied to Crude,” which introduced subscribers to DKL’s merits in October. “Israeli Two-Step in the Permian,” from early June, covered its sponsor’s pursuit of a rival refiner and the likely effect on DKL.