Which Oil Stocks To Buy After The Global Shuffle?

by: Jonathan Yates

Many major oil firms are pulling back from operations around the world. Royal Dutch Shell (NYSE: RDS.A, BP (NYSE: BP), and Occidental Petroleum (NYSE: OXY) are selling assets in the Middle East and Africa. Apache (NYSE: APA) is looking to get rid of its holdings in Argentina.

From that trend, there should be two sets of winners.

The first will be those firms operating in North America. While there is certainly glamour to drilling for oil in exotic locales, according to a recent article in National Geographic, "Outside of the United States, there's neither the legal environment nor the oil services industry capacity to make shale oil and gas developments worth the cost. More than 6,000 wells were drilled for unconventional oil in the United States and Canada in 2012, and only 100 outside of North America."

That obviously puts a premium on oil and gas firms operating in North America. Certainly that has much to do with the recent massive buy of Exxon Mobil (NYSE: XOM) shares by Warren Buffett, and his previous purchases of Suncor Energy (NYSE: SU).

For investors, any major energy firms operating in North America are selling at a premium. But small caps like Octagon 88 (OTC: OTCPK:OCTX) and Americas Petrogas (OTC: OTCPK:APEOF) have plenty of upside. As detailed in a previous article on Seeking Alpha, "Americas Petrogas is Undervalued and Doing Something About It," Americas Petrogas has hired Jefferies LLP, an investment bank, to conduct a "strategic review" to enhance shareholder value. So far that is working as the stock price as jumped.

Octagon 88 received very bullish reports about its holdings in Alberta, the rich province in Canada. The company recently released its production video for the Elkton Eriosional Edge. There is third-party validation of potentially more than one billion barrels of oil for that block.

In terms of the market speaking about the appeal of North American energy assets, according to a recent Wall Street Journal article, China has invested over $44 billion in recent years in the sector. Another article in The Wall Street Journal reported that Repsol (REPPY), the Spanish oil firm, is looking to spend up to $10 billion for North American energy resources.

If oil companies are selling around the world, others will be buying.

Three that should expand holdings are CNOOC (NYSE: CEO), YPF (NYSE: YPF), Repsol, and Total SA (NYSE: TOT). CNOOC, the Chinese oil giant, has always expanded aggressively abroad. YPF, the Argentine major, is negotiating with Apache for its assets. After the experience of Repsol in Argentina, many oil companies are pulling back. YPF and CNOOC are looking to buy in Argentina, however.

Repsol just reached a deal with Argentina that will pay it $5 billion in bonds for its YPF stake that was seized. The bonds are backed by dollar holdings and do not have to be reinvested in Argentina. That adds to the war chest of Repsol in its quest for more secure assets, which will make it a more rewarding long term investment.

Like Repsol, BP will be a stronger long-term investment. It plans to invest the billions from the sale of assets into oil projects and upstream operations. Those will add to long-term growth. With the cash flow, BP has committed itself to enhancing shareholder value through dividend increases and share buyback programs.

Total, based in Paris, has always had a reputation of taking risks. Its Chief Executive Officer, Christine de Margerie, was described in a Forbes interview as, "..an ambassador to some of the world's toughest regimes." The title for the interview: "High Friends In Low Places."

That is bound to happen when operating in more than 130 countries as does Total. More than half of Total's 11.3 billion reserves are in The Middle East and Africa regions that Occidental, Royal Dutch Shell, and others are leaving. That results in better margins for Total (this happens with operations that are less than price, no matter what the asset class).

The upside for Total is that almost one-third of its reserves are in Africa. But that produces less than one-tenth of the annual sales volume. The potential there is obvious. Total is committed to Africa with plans to spend billions to expand its presence, which should also increase the net revenue impact for the bottom line.

A major factor for Total SA going anywhere and everywhere for oil reserves is the belief of Margerie in "Peak Oil," as stated in the Forbes interview. If that is true, then CNOOC, YPF, BP, Repsol, and Total SA will be rewarded for gobbling up assets around the world over the long term, no matter hostile the local environment. But, as Dallas oil man JR Ewing said to his younger brother Bobby when asked about global reserves, "The world's been running out of oil since the first barrel was pumped."

But, for the short term, the political stability and business security of North America makes its energy sector the most appealing from the shuffle, with publicly traded companies ranging from prominent blue chips such as Exxon Mobil and Suncor Energy to promising small caps like Octagon 88 and Americas Petrogas.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.