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TheStreet Open House

Big Oil Still Undervalued, Despite Crude Run-Up (Correct)

Stocks in this article: COP BP XOM

(Corrects story originally published July 11 to say the Exxon dividend yield is 2.7%.)

NEW YORK ( TheStreet) -- Recent rallies in oil prices will have a significant impact on broader stock values and consumer spending, made worse by this week's surge above $105 a barrel.

But with prices holding at these heights, investors should consider moving into stocks in the energy space.

Surprisingly, what makes these choices most attractive is the fact that some of the biggest integrated oil companies have underperformed relative to the S&P 500 in the last 12 months -- with some actually showing bearish performances year-to-date. With the S&P 500 gaining more than 17% during the same period, the divergence is striking.

Evidence of stronger demand and weakening supplies have been seen alongside disruptions in the Middle East, and this creates a bullish scenario for one of the market's most undervalued sector.

U.S. crude stockpiles fell again this week, with a drop of 9 million barrels. This was far larger than the 3.8 million barrel supply decline that was expected by analysts, and this sent prices to their highest levels since May of last year.

Gasoline supplies were also lower (by 3.5 million barrels), creating additional evidence that summer demand has picked-up.

This creates opportunities for investors on all time horizons, as long-term demand for oil will continue to build in emerging markets, as well.

Here we will look at three undervalued oil companies with a consistent record of profitability and strong dividend yields. These combine to offer high probability opportunities, even if oil stocks continue to stall relative to the rest of the market -- as elevated dividend payouts help offset any near-term sluggishness.

In recent years, ConocoPhillips (COP - Get Report) has gone to great lengths to streamline its operations and focus on its most profitable businesses. This puts the Conoco in an unusual position in the industry, as it directs nearly all of its efforts toward exploration.

The company has seen improvements in its balance sheet after selling some of its less-profitable businesses, with significant reductions in debt and a better allocation of resources devoted to its most successful operations.

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