If you buy only one energy stock. . .

The oil sector sure has been down in the dumps lately, but it’s definitely time for investors to get ready for the turnaround. To participate in the group’s comeback, core investment portfolios should have at least one fundamentally sound oil stock. And quite surprisingly, the energy group is no longer the worst performer year-to-date among the S&P 500’s 10 sectors.

That’s quite encouraging because energy, whose forward revenue forecast is still down, is beating the utilities, materials and telecom groups. Year-to-date, oil’s forward revenue is down 0.6 percent vs. the utilities’ decline of 5.2 percent, materials’ 3 percent drop and telecom’s 0.8 percent slide. 

So “with energy’s forward revenues and earnings improving, its valuation is beginning to come back to earth; its price-to-sales ratio of 1.43 compares to a record high of 1.56 in May, and its price-earnings ratio of 37 is down from a record high of 57.5 then,” according to Yardeni Research.

The critical question for investors is: Which oil stock or stocks provide attractive fundamental values.

Among the major oil producers, one that stands out is Anadarko Petroleum (APC), among the world’s largest independent oil-and-gas exploration and production (E&P) companies. Its vast assets and operations worldwide make it “the most attractive buyout opportunity for larger oil and gas companies,” according to one industry watcher. 

Anadarko on Tuesday purchased Freeport-McMoRan’s (FCX) deepwater oil-and-gas assets in the Gulf of Mexico for $2 billion, and its stock has been on the rise since January. Now trading at $57 a share (up from around $30 in January), the stock should hit $65 to $68 in 12 months, according to analysts who track Anadarko. The 52-week high is $73.87 a share.

The stock could fetch an even sharply higher price, if the speculation that it’s a buyout candidate proves true. “Anadarko is the most attractive take out candidate for a larger oil and gas company looking to supplement its current portfolio,” said Eric Fox, analyst at Iberia Capital, in a report on Anadarko, which he rates as “outperform.”

Second-quarter results, which he described as reflecting “its superior business model,” indicated strength across Anadarko’s diversified portfolio, “including a large U.S. onshore position anchored by the Wattenberg and certain oil assets in politically stable international regions.”   

Anadarko operates mainly in the onshore U.S., deepwater Gulf of Mexico and Algeria, but it also has expanded deepwater opportunities in basins located in China, Brazil, East and West Africa, Indonesia and New Zealand. 

In late August, the S&P Global Market Intelligence picked Anadarko as its “Focus Stock of the Week,” which carries the firm’s highest investment recommendation of “5-STARS or Strong Buy.” S&P noted that Anadarko is one of the leading oil and gas upstream companies that it covers, with a “solid track record of turning oil and gas development today into cash flow tomorrow.”

Anadarko’s proved reserves at the end of 2015 were estimated at 2.1 billion barrels of oil equivalent, ranking it as the sixth largest among S&P’s universe of U.S. independent E&P companies. During 2015, Anadarko produced on average more than 838,000 barrels of day of oil equivalents, which ranks it the second highest in its peer group. Anadarko also holds sizable acreage positions in the U.S. Rocky Mountains, as well as large holdings in the Permian Delaware Basin which, according to S&P, has the “best economics of any unconventional crude oil play in the onshore U.S., offshore Mexico, and Mozambique.”

S&P equity analyst Stewart Glickman describes Anadarko’s purchase of Freeport’s as positive for Anadarko because it won’t stress the buyer’s balance sheet and should generate $3 billion in incremental free cash flow over the next five years, “which we view as significant,“ he said.

Like many oil companies, Anadarko has been cutting back capital spending since 2015. Glickman views the sizable cuts as “prudent” given the market uncertainty over the length of the current downturn in energy.

So Glickman expects Anadarko to post a loss of $2.74 a share in 2016, but he sees a narrower loss of 98 cents a share in 2017, vs. a loss of $2 a share in 2015. Over the near term, he expects Anadarko will focus on projects with potential for near-term payoffs, including Rocky Mountain expansion, as well as “U.S. Gulf tiebacks to existing infrastructure of Mexico.” 

He sees it as “understandable” that Anadarko trimmed its quarterly dividend earlier this year by 81 percent, to 5 cents a share (giving it an annual dividend yield of 0.4 percent). “We see a turnaround to positive free cash flow in 2017.”

Brian Singer, equity analyst at Goldman Sachs (GS), who rates Anadarko as a “buy,” said in a July report that Wall Street’s concerns -- among them consolidation, a weak balance sheet and production mix -- are “overdone.” He noted that Anadarko has sold assets worth $2.5 billion through the first half of 2016 and that it plans further asset sales of more than $1 billion, which should address some of those issues.

“Confidence in more manageable leverage can open the door for Anadarko shares to trade at greater multiple as well as receive greater credit if management increases activity, as it seems interested in doing, modestly later in 2016,” said Singer. In July, when the stock was trading at more than $50 a share, the analyst raised his price target to $68 a share from $67.

Noting Wall Street’s upbeat valuation of Anadarko, S&P Global’s Glickman, who has a price target of $65, points out that a “peer-premium valuation for Anadarko is supported by by an estimated free cash flow surplus in 2017, that’s also above peers.”

Investing in the E&P business, he noted, “brings risks, which can be substantial.” So he expects Anadarko to use proceeds from asset sales on debt reduction.