Examining European oil companies

Because of investor pessimism they are cheap, but they boast high dividend yields and returns on equity.

By MSN Money Partner Jun 22, 2012 11:32AM
By Sheldon Liber

Someone asked me recently if I had taken a look at Total SA (TOT), the French oil company. Any contrarian investor has to be giving some thought to depressed oil stocks lately, and even more so if they happen to be headquartered in Europe. Oil stocks -- and energy stocks in general -- always appear somewhere on my radar screen.

 

Total is a giant company with a capitalization of $98.7 billion. For comparison, I examined Royal Dutch Shell (RDS.A) of the Netherlands and Statoil ASA (STO) of Norway. Shell is more than twice the size of Total at $206.5 billion, and Statoil is comparable at $73.2 billion.

 

If the world's economy remains depressed or sags further, these stocks, while being financially sound and fairly priced, may fall due to lower oil demand. Starting with fundamental metrics, the following is a comparison between the three European companies and our own U.S. oil giant Exxon Mobile (XOM), which has a market capitalization of $386 billion, for good measure.

 

Price-to-earnings (trailing twelve months -- TTM)

Statoil: 5.59

Total: 6.50

Shell: 6.64

Exxon: 9.96

 

Price-to-sales (TTM)

Shell: 0.44

Total: .046

Statoil: 0.65

Exxon: 0.90

 

Price-to-book (most recent quarter)

Total: 1.12

Shell: 1.20

Statoil: 1.58

Exxon: 2.53

 

Price-to-earnings-to-growth (PEG)

Shell: 0.23

Statoil: 0.65

Total: 0.91

Exxon: 1.05

 

Price-to-cash flow

Total; 2.3

Statoil: 3.4

Shell: 4.9

Exxon: 7.2

 

Return on equity

Statoil: 29.37%

Exxon: 25.55%

Shell: 18.35%

Total: 18.01%

 

Dividend yield

Total: 5.8%

Shell: 4.7%

Statoil: 3.8%

Exxon: 2.7%

 

When looking at these figures, what stands out first is that all of the stocks seem to be in the bargain bin when compared to historical numbers.

 

Also, every single ratio beats the market average by a large margin, which is indicative of investor pessimism. And given that Exxon's figures are almost universally last, investors have made it clear that sticking with the strongest balance sheet and staying in the U.S. may be the safest bet.

 

While Exxon may be the safest bet, it is not necessarily the best investment. For investors looking for dividend income, Total stands out as having the highest yield, which can benefit long-term investors who can reinvest the dividend to allow for compounding returns. The figures for the price-to-earnings, price-to-sales, price-to-book, and PEG are very low with no clear winner in my view.

 

The historical market average for the price-to-cash flow is around 10.0, making these companies look very cheap. The return on equity exemplifies how soundly management is doing in deploying resources. While double digits ROE is good, high double digits ROE is great -- and these companies, given the state of the world, are stellar.

 

All of these companies have strategic global assets, so investing in any of them does not mean betting entirely on any one particular economy. However, if one were to be swayed by national economies then Statoil in Norway would be the most desirable. Norway's economy is one of the most stable and least burdened by debt of any in the world. I would probably view France as the most troublesome because it is most central to the difficulties in Europe, even if it is not yet in peril.

 

My somewhat foggy crystal ball indicates that the world economy may be in a funk for a decade or more. Still, any one of these dividend-paying stocks can outrun the overall market in the long run. These companies clearly deserve consideration.

 

Sheldon D. Liber is the CEO/CIO of Chasing Value (TM) Asset Management, Inc., financial author, and private investor. You can follow him on Twitter: @chasingvalue

Liber owns Royal Dutch Shell and Statoil stocks.

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