2 Best Oil And Gas Stocks To Buy, 2 To Avoid

Includes: BP, COP, CVX, PZE, TOT, XOM
by: Investment Underground

By Robert Marc Gordon

Large integrated oil and gas companies are among the largest companies in this country. Yet, even the largest, Exxon Mobil Corp (NYSE:XOM), is relatively small compared with state owned enterprises around the world. The 13 largest of these state owned companies, such as Petrobas (NYSE:PZE) of Brazil, and Saudi Aramco, control nearly 80% of worldwide oil supplies and reserves, which leaves the companies in this article spending ever more money and taking ever more risks to chase limited resources. But these companies have been around a long time, have excellent credit ratings, and some are showing creative ways of increasing values. I will analyze some of the biggest integrated oil companies including XOM, to determine which are most suitable right now for investment dollars.

Chevron Corporation (NYSE:CVX)

CVX is the world's 4th largest, and America's second largest, integrated oil company. And it is my personal favorite. CVX was trading recently at about $102 per share. Its 52-week range is from 110.01 to $84.49, and its market capitalization is nearly $205 billion. It has a P/E of 7.6, and it recently raised its dividend to $0.81 per quarter, for an annual yield of 3.2%.

It is rare when a company of the size and scope of CVX surprises analysts, yet there were surprises indeed in the third quarter of 2011, and all positive. The company reported revenue of some $61 billion, up 27% from the year earlier quarter. Profits were $7.8 billion, or $3.92 per diluted share, up more than 100% from the prior year when profits were $1.87 per diluted share.

A look inside the numbers is no less impressive. Its operating and profit margins of 16% and 12% surpass Exxon Mobil Corp's (XOM) margins (13%, 10%) and British Petroleum's (NYSE:BP) (8%, 6%). When one is talking about tens of billions of dollars of revenue, a few percentage points add up to a lot of money. Yet CVX is far from perfect. It was recently punished by Brazilian authorities due to a leak in a deep ocean well.

CVX has increased its dividend now 25 years in a row, and sports a strong balance sheet with lower debt / equity than its peers. Unlike other mature companies CVX does not do multi billion dollar stock buybacks to enhance shareholder value. It engages in smaller buybacks so as not to dilute shareholders when stock options are awarded. CVX is a quality and consistent performer, and a long-term buy and hold candidate.

ConocoPhillips (NYSE:COP)

COP is another top-tier integrated oil company. Yet its future is clouded, as it has announced its plan to spin off its refining and marketing operations from its exploration and production arm in 2012. The idea is that the sum of these two independent parts will be greater than the integrated company, which at present is this country's third largest oil company. Marathon Oil did the same kind of split earlier this year, and that undoubtedly is the blueprint that COP has in mind.

Yet COP is doing quite well in its current integrated form. In the third quarter of 2011, its earnings were $3.4 billion or $2.52 per share., up some 60% from the year earlier total. Its principal challenges are largely political in nature, as COP has assets in Libya, and is struggling with spills in offshore Chinese fields.

COP was trading recently at about $73 per share, toward the high end of its 52-week range of from $81.80 to $58.65. It has a market capitalization of nearly $97 billion, and a P/E of 7.8. It pays an annual dividend of $2.64, for a yield of 3.6%.

COP has in the last year pursued an aggressive divestment plan, so the company split plan is something of a surprise. There is too much uncertainty in my view to commit to purchase shares now, given other options available.

Exxon Mobil Corp (XOM)

XOM is the largest privately owned oil company, and among the largest corporations of any kind in the world. And it will stay that way for some time as it has publicly declared (pdf) it has no interest in separating its production from its retail arm.

XOM has recently been trading at about $80 per share. Its 52-week range is from $88.23 to $67.03. Its P/E is 9.7, and its annual dividend has risen to the rate of $1.88, for a yield of 2.4%. Its market capitalization is a whopping $386 billion.

XOM has increased its dividend each of the last 29 years. And as a testament to the long-term value of share repurchasing, XOM has retired nearly 2 billion shares since the year 2000. During the last half of 2011, the company expects to repurchase over $10 billion worth of stock.

In the third quarter of 2011, profits were up by over 40% from the year earlier, to $10.3 billion, or $213 per diluted share. XOM though is also well set up for the long haul. Its ten year average replacement rate of oil and gas produced is over 120%. In fact, in 2010 the company managed to add proven reserve amounts over twice of what the company actually produced. The company will spend over $30 billion this year in its ongoing efforts to keep reserve levels high.

XOM again, is an obvious a buy and hold stock.

Total S.A. (NYSE:TOT)

French integrated oil giant TOT shares are sold as ADR's on the NYSE. These ADRs have been trading at about $52 per share. Its 52-week range is from $64.44 to $40.00. Its market capitalization is about $117 billion, and its P/E is 7.3. The company only recently indicated it was moving to a regular quarterly dividend as opposed to the semiannual dividend that has been paid for many years, the current rate is $0.82 per quarter, for a yield of 6.3%.

TOT has been caught to some extent by its geography. Roughly 2% of its production has been from Syria, but political winds have removed TOT from that country. Further, the economic state of the Eurozone countries has slackened due to sovereign debt issues, and resulting consumer and business confidence declines have negatively affected TOT, which sells much of its product in Europe.

In the third quarter of 2011, TOT reported profits of $4 billion, which was 24% higher than the year-earlier quarter. However, 11% of that gain, or nearly half of it, was solely due to currency gains. While 13% is nothing to embarrass anyone, it trails the other companies in this list. TOT is a strong company financially, with only a 15% debt / equity ratio. And its dividend surely is compelling. Yet other companies here have a history of raising their dividends that TOT lacks, and given the climate in Europe for the foreseeable future, I would avoid this issue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.