3 European Oil Companies for Contrarians

Kurt Wulff (McDep Associates) submits: We classify buy recommendations Royal Dutch Shell, plc (RDS.A), Statoil ASA (STO), and Total S.A. (TOT) as Contrarian Buys to acknowledge that the current stock price trend is down in comparison to the 200-day average. By a similar measure, oil price may have begun a downtrend measured by six-year futures at $83 a barrel settling below the 40-week average of $86. The Contrarian Buys are attractive on a value basis with McDep Ratios at 0.75, 0.71 and 0.60 respectively. Income is strong with dividend yields indicated at 6.2%, 4.3% and 5.9%. The abrupt change in price trend in currency markets may have contributed to the greater stock price decline for TOT, the only large cap in our coverage headquartered in a country that uses the euro. The currency effect may be temporary as oil price tends to adjust to a global level in real terms. The oil price decline does not cause us much concern as our long-term assumption for calculating McDep Ratios is $75 a barrel adjusted for inflation. At the same time, we are optimistic that natural gas price may be near an upturn before next winter.Analyzing each company by business segment, we see TOT most concentrated on oil at 58%. STO is the leader in natural gas with concentration of Net Present Value at 49%. Traditionally, having a high downstream concentration, RDS apparently intends to reduce its 26% concentration further. During the past few weeks it may have been an advantage to have more downstream for a natural hedge on crude oil price.The main determinants of present value can be captured by initial cash flow and the time it lasts. Along those lines for oil reserves, TOT, RDS and STO have adjusted life indices of 8.5, 6.8 and 4.1. In the same order of reserve life, the three companies have present value multiples of unlevered cash flow (PV/Ebitda) for oil of 6.7, 5.6 and 4.5.Cash flow margin for upstream production may have stabilized somewhat after fluctuating wildly in the three quarters after the global financial panic in September 2008. Behind the fluctuations in downstream cash flow there may be a broad trend that bottomed in late 2009. We like systematic accumulation of low McDep Ratio stocks of strongly financed companies with valuable oil and gas resources. McDep Ratios have declined further while investors may be concerned about the debt of lesser European countries among other factors. Meanwhile, Total, Statoil and Royal Dutch Shell are engines of economic growth, which is much of the solution to current problems.Complete Story »