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TheStreet Open House

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

Stocks in this article: COP BP XOM

Valuations remain low, with the stock's P/E seen at 10.8, and its 4.2% dividend yield make it attractive, even for those that see near-term weakness in the sector.

In its attempts to emerge from the Deepwater Horizon rig disaster in the Gulf of Mexico, British Petroleum (BP - Get Report) has been involved in major restructuring efforts that have been marked by major asset sales in various locations around the world.

Like ConocoPhillips, these activities have allowed the company to refocus its efforts and strengthen operations in its most profitable businesses. Most surprising is that BP has maintained a relatively healthy balance sheet, even after absorbing settlement costs incurred after the massive oil spills from 2010.

These events did prompt the company to put a hold on its dividend payouts, but these were offered again in 2011 and have been raised steadily since then. The stock's dividend now stands at 5%, and, with a P/E of 6, BP's worst days are behind us. Last, we look at Exxon Mobil (XOM - Get Report), which is the largest independent energy company in the world.

Exxon's operations are much more diversified than those of the other two companies. Exploration and production activities generated roughly two-thirds of the company's revenues last year, with its refineries making up most of the remainder.

Part of Exxon's focus is to build on its position the country's largest producer of natural gas, and this is likely, given the size of its capital spending budget.

Dividend yields in the stock are seen at 2.7% and its P/E of 9.4 supports the argument for additional upside. Add to this Exxon's strong cash flow and stable balance sheet, and you have another opportunity for stable investment in an undervalued sector.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is a university teacher in international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of websites, including MarketBulls.net, Seeking Alpha, FX Street, and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.
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