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Major integrated oil and gas companies were evaluated by comparing growth trends and valuation multiples in a prior article. Three long picks were selected and two shorts were selected as the basis for a net-long, hedged position on big oil companies. This analysis reaffirms the valuation discrepancies between select U.S. oil companies and their European counterparts.

Computing Future Valuations from Growth Projections

Investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. Growth and value estimates for big oil short and long candidates are provided below:

Ticker

Company

Country

Pick

P/E

Earnings Growth Est.

P/S

Sales Growth Est.

OXY

Occidental Petroleum

USA

Short

11.6

10.9%

3.0

6.4%

COP

ConocoPhillips

USA

Short

11.3

-2.0%

1.1

5.9%

STO

Statoil

Norway

Long

6.3

3.5%

0.7

5.2%

TOT

Total SA

France

Long

8.6

7.1%

0.6

4.7%

BP

BP

UK

Long

8.0

3.1%

0.4

7.1%

It looks as though the Eurozone crisis has created an opportunity for buying big oil companies in Europe at a discount to oil companies in the U.S.

Unfortunately, these data are static and flat. How would valuation multiples evolve given current growth projections year after year? Future valuation multiples of these picks were modeled by combining expected growth and trailing valuation multiples for sales and earnings. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earnings growth estimates and historical sales growth follow:

(click to enlarge)Forward PE

(click to enlarge)Forward PS

These projections illustrate how BP, Total, and Statoil's lower valuations dominate Occidental Petroleum and ConocoPhillips in the medium term.

Since Occidental is the fastest growing sell pick, estimated convergence years were calculated below for Occidental and its competitors:

OXY Competitor

P/E Equivalence

P/S Equivalence

ConocoPhillips

N/A

2222

Statoil

2019

2138

Total SA

2019

2112

BP

2016

N/A

The projected crossover dates span at least three years into the future for the price-to-earnings multiple, which is about the predictive reach of trends and analyst estimates. Even incorporating Occidental's solid growth rates, future valuations still favor the buy picks.

Conclusion

Going long BP, TOT, and STO while shorting OXY and COP is a solid relative value play. Hedging will attempt to provide resistance broad market or oil price movements while capture the valuation difference between these long and short picks.

Please read the article disclaimer.

Source: Big Oil: Exploit Global Valuation Differences