5 Big Dividend Oil Majors For The Contrarian Value Investor

Includes: BP, CVX, LUKOY, PBR, STO
by: VancouverBull

When it comes to the oil industry and oil-related stocks, it's sometimes hard to look past the negatives. Attempts continue today by governments worldwide to end subsidies of big oil and reduce our overall dependency. Also, the question remains about the sustainability of fossil fuels over the long-term. The impact on the environment remains a hot topic, which was only exacerbated by the recent Deepwater Horizon explosion in 2010, which ended up spilling huge amounts of oil into the Gulf of Mexico and brought companies involved like Transocean (RIG) and British Petroleum (BP) to the brink. BP still hasn't fully recovered, and today provides some attractive fundamentals with a P/E of 5.4, a P/B of 1.2, and a current dividend yield of 4.3%.

All of those reasons contribute to the fact many investors have been lukewarm to some of the large energy companies. Some will say they are all legitimate concerns, but whether you like it or not, big oil companies are here to stay for quite a while longer. While alternative fuels have made some inroads in the energy sector, oil and gas remain the dominant players. And many of the big oil companies have been dipping their toes in the alternative energy waters in recent years-and they have far more capital to put into those efforts than smaller startups.

From an investment perspective, the various fears about oil and gas companies, alongside continued lingering fears of the next financial crisis around the corner, have created some interesting opportunities in this sector. Many of these companies' shares have been kept at low valuations, even with the market upturn in recent months, and that's caught the attention of many dividend and value investors. Analysts are high on this sector right now due to record-high prices at the pump. Besides BP, here are four more oil and gas majors worth a particularly long look.

Statoil ASA (STO) : This Norway-based oil and gas giant has operations in 34 countries across the globe. It has a market cap of about $86.5 billion, and in the past year has taken in more than $110 billion in sales. In recent years it has made several deals with natural gas companies in the U.S., and in December 2011 Statoil was able to acquire Texas-based Brigham Exploration (BEXP) after a successful tender offer.

Statoil's size, high ROI, and strong reputation is part of the reason why the company gets strong interest from funds and retail investors alike. What's not to like about Statoil's strong $6.09 in cash flow per share, which is more than four times the market mean. The company also has an impressive 3.5% dividend yield, based on a current price hovering around the $27 level.

Petroleo Brasileiro SA (PBR): One of the world's largest integrated oil and gas companies, Brazil-based "Petrobras" is active in 28 countries. The company has a $172 billion market cap and is one of the fastest-growing oil majors, due to ever increasing production coming from Brazilian pre-salt fields with vast petroleum reserves. The huge fields, with decades of reserves, are the major reason many investors can't stay away from this stock, despite an always intrusive Brazilian government. You either love it or hate it.

Petrobras is generating $5.27 in cash flow per share and offers a 4.9% dividend yield, based on a current price of $26.50 and $1.295 per ADR distributed to shareholders - in dividend + IOC - over 2011. Petrobras' yield-adjusted PEG is about 0.78. This comes in well under a 1.0 upper limit, often used as a cut-off point among value investors. Based on PEG, Petrobras could almost be considered a bargain, which is supported by Petrobras' other major valuation parameters, trading at for just 8 times EPS alongside a P/B of 1.3.

Chevron (CVX) : California-based Chevron is one of the world's largest oil and gas companies with a $209 billion market cap, and it is also involved in the lubricant, petrochemical products, geothermal energy, and biofuels arenas. It's taken in nearly a quarter-trillion in sales during the past year.

Chevron is a slow-grower if you use a value-based model, as this oil major has been growing earnings at a rate of just 5.1% over the long haul, but it is offering a solid 3.1% dividend yield and also trades at a P/E of merely 8, just as Petrobras. It makes for a 0.96 yield-adjusted PEG, which also comes in just under 1.0. If you use the 1.0 as a threshold, be aware that a significant rise in price could push it over. Another reason for value and dividend investors alike is Chevron's stability resulting from its debt-to-equity ratio of merely 8.3%.

Lukoil OAO (OTCPK:LUKOY) : Russia-based Lukoil (which trades OTC) is the world's largest privately owned oil and gas company based on proved oil reserves, and is responsible for about 18% of Russian crude oil production. Its products are sold in Russia and former USSR republics, as well as Eastern and Western Europe and the U.S.

Russian investments come with a unique, potentially risky set of political entanglements. But Lukoil's location has probably helped keep its share price down, and that's precisely what draws the interest of value-based models used by many of us here on SA. When you're a contrarian at heart, you're looking for beaten-down stocks whose fundamentals indicated they are too beaten-down. Lukoil, with $47 billion market cap, is a prime contrarian play considering its P/E of 4.3, P/B of 0.7, price/cash flow ratios that fall into the market's bottom 20%, 18.2% ROE, and a 2.8% dividend yield based on the current $60 share price.

Based on its operating, gross and net margins, Lukoil converts an above-average percentage of its revenues to profits compared to its industry peers, with an operating margin of 11.36%. As mentioned, with Lukoil trading only slightly over than 4 times EPS, and when you factor in its dividend, Lukoil's PEG comes in at only 0.72, well below 1.0. With a debt-to-equity ratio of only 12,3%, and taking into account its proven reserves and impressive fundamentals, it seems LUKOY.PK is also long overdue for some affection from the investment community.

Disclosure: I am long CVX, BP, PBR, STO, OTCPK:LUKOY.