The oil industry seems to be constantly undervalued. Many of the large companies in this space produce massive amounts of revenue and trade at low multiples. However, there are still ways to identify companies that I feel can outperform American giants such as Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX).
Three European oil companies, all of which trade at even greater discounts when compared to industry competitors, are set up for long-term success all the while returning 3%-plus in dividend yield back to shareholders. These three companies are BP plc (ADR) (NYSE:BP), TOTAL S.A. (ADR) (NYSE:TOT), and Statoil ASA (ADR) (NYSE:STO).
BP is a name that everyone is all too familiar with. When people think of BP, their minds are still fixated on the Gulf of Mexico disaster that occurred more than three years ago. In total, BP has paid restitution in excess of $40 billion for this catastrophe, and is well on its way to putting the event in its rear view mirror.
These endeavors will help BP continue to grow, and most importantly the increase in operating effectiveness will help the company to expand its profit margins. BP plc (ADR) (NYSE:BP) also recently divested its position in the joint venture TNK-BP, resulting in a nearly $12 billion payout in cash and stock, $8 billion of which the company will use to buyback shares.
I would consider BP to be heavily undervalued. The company currently trades at 7.9 times forward earnings with a 0.4 price-to-sales ratio, both of which are below that of Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM). BP also pays out $2.16 (5.3%) per share annually with a very manageable payout ratio of 55%. I would look to accumulate shares of BP plc (ADR) (NYSE:BP) now with a long-term price target of $50.
Vive la France
TOTAL S.A. (ADR) (NYSE:TOT) is another large European oil producer (based out of France) that operates in both upstream and refining operations and develops petrochemicals. Total’s performance is more tied to growth than the other two oil producers that we will evaluate.
The company just delivered outstanding Q1 2013 results that truly highlight how effective the French company is at generating revenue. These results revealed revenue growth close to 30% vs. the industry average of just 1%; net income growth of 27%; operating cash flow growth of 193% vs. the industry average of just 21%; and EPS growth of 36%.
The most important thing to take away from these Q1 results is how effective TOTAL S.A. (ADR) (NYSE:TOT) is at converting its revenue into net income. The company showed that it is able to have a significant increase in revenue without a similar increase in operating expenses. This ability will go a long way in terms of future growth, as revenue growth will be able to increase earnings per share numbers significantly.
I would consider Total also to be extremely undervalued. The company currently trades at a forward price-to-earnings multiple of just about 6.9 with a price-to-sales of only 0.44. Total also pays a nice dividend of $2.74 (5.9%) per share on an annual basis with a 40% payout ratio. I would look to buy TOTAL S.A. (ADR) (NYSE:TOT) now and have set a target price of $55 per share.
Norwegian oil
Finally, let’s discuss Norwegian powerhouse Statoil ASA (ADR) (NYSE:STO). I believe that Statoil has the greatest growth prospects as well as greatest price appreciation potential of all three of the companies mentioned. In the past few months, Statoil has been in the headlines announcing great news in terms of growth. The company recently won the rights to 15 additional leases in the Gulf of Mexico, which will increase its lease total to 340 in this region.
Statoil also recently announced that it has found considerable additional resources in the North Sea that have the potential to generate between 40 million and 150 million barrels of oil.
Another aspect of Statoil ASA (ADR) (NYSE:STO) that is unique is its innate ability to generate cash. The company currently operates with a 13.8% cash-flow yield (percentage of free cash flow in relation to revenue.) This number indicates that Statoil is extremely effective at not only generating massive amounts of revenue, but operating efficiently. This, in turn, frees up vast amounts of cash for share buybacks, dividend increases, or increasing capital-expenditure spending.
Once again, Statoil is trading at a severe discount. The company currently trades at 7.9 time’s forward earnings with a price-to-sales ratio of just about 0.6. As with all of the companies mentioned, Statoil sports a nice dividend as well. The company currently pays out $0.91 (3.9%) per share on an annual basis. I would look to buy shares of Statoil ASA (ADR) (NYSE:STO) now with a long-term price target of $40.
Opportunity
There is tremendous value in the oil industry right now. Although huge names like ExxonMobil and Chevron are trading at discounts, there are still other intriguing options. If you are looking for significant dividend income with international exposure, these European oil companies need to be on your radar. I would pounce on the buying opportunity that was the 300+ point drop in the Dow Jones industrial average in recent weeks and look to initiate a position in one of the companies.
The article Why I’m Bullish on European Oil originally appeared on Fool.com and is written by Daniel Paterson.
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