by Sebastien Buttet
Stocks of large US integrated oil companies (XOM, CVX, OXY, HES) have enjoyed a nice run-up in the last 12 months and for good reason: The turmoil in the Middle-East has sent oil futures sky-rocketing past the $100 level and economies around the world are on the mend, leading to increased demand and higher prices for crude oil.
Shares of Exxon Mobil have gone up 25% since April 2010, a substantial move for the world's largest publicly owned company. Similarly, shares of Chevron gained 32%, followed by Hess Corporation 25% and Occidental Petroleum 17% (see Table 1).
Table 1- Descriptive Stats - Large US Integrated Oil Stocks
|Stocks||Market Cap (in $ billions)||52-week Performance||TTM |
Not suprisingly, investors warmed up to the stellar performance of the U.S. oil stocks and many have expanded considerably. Exxon Mobil fetches a P/E ratio close to 14, which is at the high end of its historical multiple range, and Occidental, with a P/E ratio of 18, is no bargain either.
For investors who want to participate in the on-going energy bull market but might not like the high valuations of US oil stocks, we review the prospects of three international integrated oil companies (BP, PBR, TOT) that have also lagged for good reasons.
The case against British Petroleum is well documented. Large uncertainties remain concerning BP's legal liabilities following the Gulf of Mexico spill and the U.S. government has still to decide whether to try the company for gross negligence. BP is also in a delicate situation with its Russian partner state-owned oil company Rosneft since a judge at the High Court in London granted an injunction that blocks the proposed share-swap agreement between BP and Rosneft.
Investors shied away from Petrobras due to two legitimate concerns. First, the company is state-owned by the Brazilian government. Nationalized companies have a history of poor management, unefficient capital allocation, and unfriendly policies toward shareholders. It probably did not help that Brazil's new president Dilma Rousseff decided to replace Roger Agneli, the veteran CEO of mining giant VALE. Second, even though Petrobras sits over an oil bonanza, the oil is located under nearly seven miles below sea level and it will be an expensive proposition to extract and bring the oil to the surface. The company plans to spend more than $220 billion in the next four years to develop offshore oil fields, as well as onshore refining facilities.
Finally, investors steered clear of Total S.A., a French publicly-owned integrated oil company because of the on-going sovereign debt crisis in Europe and the fact that the company is exposed to geopolitical risks, since a large fraction of its assets comes from Africa and the Middle East.
Not surprisingly, valuations for the three international oil stocks are much lower compared to valuations for US integrated oil companies. Shares for BP and PBR even lost ground in the last 12 months (see Table 2).
Table 2 - Descriptive Stats - Large International Integrated Oil Stocks
|Stocks||Market Cap (in $ Billions)||52-week Performance||TTM |
These international integrated oil stocks are cheap! The price-earning ratio for PBR and TOT is slightly under 10, a 40% discount compared to Exxon's P/E of 14. And in addition to their attractive valuations, the three international oil stocks have something else going on for them: They all pay large dividends; Total S.A. has the largest yield with 5.2%. Investors who buy shares of Total S.A. now could well enjoy capital gains on top of the high dividend yield as the ex-date to receive the $1.58 dividend paid semi-annually is approaching rapidly: Wednesday May, 18th 2011.