Pasta or pate’? Chianti or Bordeaux?
The notion of “diversifying” into the European oil sector has been on my mind. The Europeans favor strong national oil companies, with secure markets. While my inner anarcho-libertarian fervently detests monopolies, from a rational investment perspective it is what it is. I’ve been weighing a choice between ENI and TOTAL. As I wrote in an earlier post last week, ENI crossed my radar screen due to a visit nearby one of its refineries. I liked some of the things they were doing with outsourcing.
Both Italian major ENI SpA (E) and French giant TOTAL S.A (TOT). are huge companies, with market caps in the tens of billions. Tens of thousands of employees, operations in many different countries and continents, fully integrated from upstream to marketing and distribution. Both pay fat juicy dividends, twice a year, year after year (6.63% for ENI, 6.33% for Total). Price to earnings ratio is low compared to S&P 500 average of , to be expected with large companies in a mature industry.
No-Go Places Could Be Profitable, Yes?
I like the fact that European companies are a little more adventurous overseas. They play in sandboxes which are off-limits to U.S. majors, such as international pariahs like Iran and Venezuela.
ENI is partnered up with PDVSA in Venezuela, helping to develop the Orinoco heavy oil deposits. It is (or was, and will be again) very active in Libya. No doubt ENI execs were lustily cheering on NATO airstrikes from the safety of their wood-paneled boardrooms.
TOTAL is also in Venezuela, Syria, Myanmar, Iran and Yemen, all no-no countries according to the US State Department.
But resources are limited, I can only buy one. Let’s see if we can differentiate a little.
Notable evaluations numbers, mostly combined from Google Finance and Scottrade. Some I added myself, just for kicks.
ENI vs TOTAL
What’s an Employee Worth?
In my day job, one of the metrics I sometimes like to look at when evaluating suppliers is number of employees versus total yearly income. A supplier sells materials and labor, or just labor and consumables if it’s a service. Revenue per employee is a good measure to see how productive the business is.
So, I threw in a couple of calculations as Market Capitalization per Head and Total Earnings per head.
Earnings is a very simple calculations for these purposes, I just took Earnings Per Share (EPS) and multiplied by total shares. No consideration for EBITDA, or normalized-after-tax-income or fully diluted shares, or anything like that. It’s just a simple flash measure of how productive or inefficient each company is in utilizing their human resources.
By this metric, the French are about 60 percent more efficient than the Italians. But how do they stack up against the Yanks?
Back In The Good Old US of A?
ConocoPhillips (COP) is a dividend-paying stock I’ve been thinking hard about. So let’s plug that in…
ENI & TOTAL vs. CONOCOPHILLIPS
COP is about the same market cap, $92 billion, but much more efficient in terms of earnings per employee, $349K per head versus $177K and $105K. Five-year dividend growth is more robust as well, 12.75% versus 7.07% for TOTAL, and a decidedly unimpressive negative growth of -1.86% for ENI. With a dividend yield of 3.70%, good financial and excellent growth prospects, COP is heartily recommended on a number of dividend investing blogs.
Still, I like the idea of investing in an overseas oil major. Perhaps expanding the search might yield more insight.
More Contenders
Meet the Norwegian giant oil company, STATOIL A.S.A. (STO) In terms of market capitalization, it’s in the range of the previous three, although nowhere the size of our other new contender, Petroleo Brasileiro (PBR), — better known as Petrobras — weighing in at a hefty $176 Billion.
In terms of both earnings per employee and five-year dividend growth, both STO and PBR are right up there with COP.
I like that STO has substantial worldwide operations, and an equally strong presence at home. The Norwegian Krone is widely seen as a stable currency. I have little bit of exposure to the Krone in the Merck Hard Currency Fund — which has done quite well in these inflationary times.
PBR I quite like. In my day job, we do quite a bit business in Brasil. Although Petrobras can be a demanding customer, there’s no gainsaying the fact that they are expanding like gangbusters, from upstream discoveries to new downstream grassroots refineries. Petrobras is not necessarily Brazil-limited. It’s very active in Argentina and now in the Gulf of Mexico. With all the cash it’s spinning off, I suspect it’s only going to grow.
Looking Back to 2008
Another important condition that we should be mindful of is the 2008-2009 market low point. Should the market tank again in the next year or two, chances are pretty good these stocks could revisit those five-year lows. With dividend payers though, this is somewhat offset by a higher yield and more reinvested dividends at the lower price point.
By this metric, ENI and TOTAL seem to be the “safer” bet.
| ENI | -37.01% |
| TOTAL S.A. | -11.92% |
| CONOCOPHILLIPS | -103.08% |
| STATOIL | -85.96% |
| PETROBRAS | -50.50% |
We could stand to lose the most with COP and STO. A couple of things hold me back on STO:
(1) It’s trading close to a 52 week high (while PBR is not)
(2) Its price to tangible book ratio is 2.3, a bit high (PBR is 0.8)
(3) Only one ex-dividend date per year.
This last point probably bothers me the most. With only one dividend payout per year, the power of compounding has no chance to work in our favor. I could stand two dividends per year (like with E and TOT), but one I could pass on. PBR, on the other hand, pays multiple times a year, if only somewhat irregularly.
So, What To Do?
I really had meant to compare only the first two companies, Eni and Total, but the deeper I got into the evaluation, the more choices revealed. I also looked at BP, Shell and a couple of other not-as-well-known European companies like OMV and Repsol. In the end, the data points to Petrobras as a better choice, or at least better than Total, and a good deal better than ENI.
And a nice 4.86% dividend, while not in the 6% range, is not too shabby either. I now have a limit buy order pending for PBR at $24.
Another strategy would be to write a put option for the stock. For readers so inclined, an optionsXpress promo code could be had for a $100 bonus.
What do you think, Readers? Should I have forgotten about international exposure, and just gone with COP?
How about Statoil and Eni and Total, would you feel comfortable with oil companies that conduct business in countries with dodgy governments?
( Humorous side note on these three companies. Bring up ENI’s website, and the language on the landing page is English. Same with Statoil and Petrobras. With TOTAL, it’s French. Oui, naturellment.)
(As always, big BIG disclaimer. The preceding is provided to readers for entertainment and educational purposes, and not meant to be a recommendation to do anything. This is what I do with my own money. Do your own research and due diligence, and make your own mistakes. Don’t run with scissors. And eat your vegetables.)
A 4.86% dividend is defintiely not too shabby. Considering what the treasury, cd’s, and bank savings interest rates are paying, nearly 5% is very refreshing if the risks are sufficiently low
I think your 2008-early 2009 comment is right on!
I was thinking the other day that if interest rates rise sharply, then dividend paying stocks could lose their luster. Then again, if that were to happen, $14 Trillion of debt would get that much harder to service.
Awesome stuff. I love how these searches take you to new investment opportunities that you didn’t expect when beginning the search. It feels a like “Sherlock Holmes”-y to me.
Based solely on the data presented, PBR and TOT seem to be your best choices. While you seem to have dismissed TOT, I want to know more about two areas:
1) You present “earnings per head” and use it to dismiss TOT. For me, stock purchases are about the future as much as the past. I’d like to know what this number was one and two years ago. If it’s improving, I may still have a winner. This is another reason I’m skeptical of COP. How much upside do I have when the operation is already that efficient? If I’m evaluating future opportunity it might already be baked into the equation.
2) I want to back up to the point you started from. What are the external themes playing out in these regions? Purchasing TOT in the heat of a European crisis presents both opportunity and risk. What’s the economic outlook for PBR’s playing field. You present some of that here, but I’d still want more.
Hi AJ, thanks for the great comment.
It’s not so much that TOT was summarily dismissed, it’s that funds are limited. With regards to future upside, PBR seems to have the most headroom for growth. Any company with the stated goal to more than double oil production (to 4.9 mil bpd) within the next 10 years, needs to be taken seriously.
By comparison, TOT doesn’t have access to the deposits that PBR has to be able to have these goals.
But with P/E’s like these, we’re not necessarily looking at these stocks for high growth, just a good likelihood for value retention and a sustainable dividend stream.
I agree with Roshawn. With how low interest rates have been 5% is nothing to scoff at. If there are manageable risks, I would jump right on this.
Hi Miss T – the risks are there, with with enough diversification, hopefully they can be managed.
I like how you’re so thorough in your investment decisions! A 4.86% dividend does sound pretty good. I don’t know much about oil companies but I’d probably stay away from the ones that do business with shady governments. I generally prefer long term low risk investments because I can’t stomach volatility. -Sydney
Hi Sydney – Venezuela is a bit of a risky play, but 70 billion barrels of measured reserves are a powerful attractant. It will be interesting how Chavez’s current illness plays out.
I have to admit 101 that after reading this post, it felt as if I just had a great Mediterranean dish ie I loved it. No surprise as this is my beloved sector and you did a great job laying out your investment case. I think you can’t go wrong with PBR, especially that they have a decent footprint in South America which is stable relative to the MENA region.
Glad you liked it, BTI.
Looks like PBR is going to be the South American 800-pound gorilla.
Thanks for thinking aloud here and sharing your analysis. I wouldn’t limit yourself to COP. The EPH productivity measure indicates that others are doing it better, and the remainder have lots of upside potential.
I chose XOM to be included in my 2012 Money Pros Index because I believe oil will be a major factor in geopolitical events next year. Der, I can hear most people saying. When has oil not been a factor? Call it a hunch, but I have a feeling that an oil crunch may present itself prior to the election and that means outsized profits for oil majors.
Hi Hunter — If the majors start making good profits in Q2, look to the politicians to start ventilating about “windfall” profits.
Good pick on XOM.
Since selling my BP stock I haven’t owned any oil stock. I’ll look at adding one of these to my portfolio.
Let us know which one!
My husband just came back from a business trip to brazil. He was very impressed and very bullish about the place. He wants to find a brazil fund to invest in. They also have a ton of in country organic growth and the people are very talented so they are more insulated than places like china from economic fluctuations because they don’t have as big an export business as other places. Must put it on my to do list. You just verified his initial impression of the place.
Hi FGA – You’re right, the markets in Brazil are heavily protected with high tariff barriers. The downside to that is that some goods are terrifically expensive. I’ll be heading to Sao Paulo either in December or January. I haven’t been in a couple years, I’ll be an interesting trip.
I think when it comes to oil companies, the more diversified you are the better. Especially after BP and XOM’s spills.
Such accidents can happen and when it does, it could wipe out your investment.
I’ve looked at STO in this space. Statoil has some great plays in the North Sea that look promising going forward, for both oil and NG.
Robert – I have a semi-soft spot for a company that names its largest field “Troll”.
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