BP and Shell are sound buys, but there may be better value elsewhere.
The UK is home to two of the world's biggest oil companies, BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB). Both of these are often suggested as good long-term shares for Foolish investors, thanks to their rich stream of dividends, large size and solid prospects.
Although BP and Shell are both sound choices, they aren't the only game in town. Today I'm going to look at the other two major integrated oil companies in western Europe, Total (NYSE: TOT.US) and Repsol (OTC: REPPY.PK), and see how they compare in value terms to BP and Shell.
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Financial titans
Integrated oil companies -- companies that both extract oil and sell refined petroleum products -- are all pretty big. Shell is the biggest company in the FTSE 100 (UKX) and BP ranks in the top five.
Although Total and Repsol are smaller, both would comfortably qualify for inclusion in the FTSE 100:
| Company | Market Cap | 2011 revenue | 2011 Pre-tax profit | P/E | Yield |
|---|
| Shell | £140bn | £302.5bn | £35.8bn | 7.6 | 4.8% |
| BP | £81.5bn | £241bn | £25bn | 4.9 | 4.4% |
| Total | £68bn | £148bn | £21.4bn | 7.1 | 6.3% |
| Repsol | £11.2bn | £48.8bn | £3.3bn | 7.1 | 4.5% |
It's interest to see how consistent the price-to-earnings (P/E) ratings of these companies are -- except for BP. BP's discounted P/E makes it clear that the company is still being penalised for its Gulf of Mexico spill, something that will probably persist until all compensation and penalty payments have been finalised and it has delivered at least one more year of solid results.
A second factor to note is that Repsol's figures for 2011 may not be all that indicative of this year. In April 2012, Repsol's 57% stake in Argentina's largest oil company, YPF (NYSE: YPF.US), was nationalised without compensation. In 2011, YPF accounted for 26% of Repsol's operating profit and 45% of its reserves.
Giant reserves
In the table below, I've included some key reserve and production data for each company, along with the enterprise value per barrel of its reserves -- a key metric used in valuing oil and gas companies:
| Company | Proven Reserves (boe) | 2011 Production (boe/day) | 2011 Reserve Replacement Ratio | Enterprise Value/boe |
|---|
| Shell | 14,250 million | 3.2 million | 99% | £11.02 |
| BP | 17,700 million | 3.5 million | 103%* | £5.65 |
| Total | 11,400 million | 2.3 million | 185% | £7.24 |
| Repsol | 1,200 million | 298,800 | 120%** | £10.75 |
*Only 83% excluding BP's stake in TNK-BP, which it hopes to sell.
**Target, following the loss of YPF reserves and resources. Last year's actual figure is meaningless.
The EV/boe column provides another clear illustration of BP's discount to its peers. The market is currently valuing BP's reserves at half the price of Shell's and two-thirds those of Total.
Equally surprising to me is the high value placed on Repsol's reserves. Repsol is currently digging deep to replace its lost YPF assets and has already said it will cut its dividend to free up cash, so that it can spend $1bn a year on exploration activities and increase production from existing assets.
It's a very ambitious plan, and although Repsol expects to fund it from free cash flow, not new debt, it's too soon to say whether it will succeed. It's also too soon to see what the impact of the loss of YPF will be on Repsol's 2012 earnings.
Which would I buy?
For me, each of the four companies above has different attractions and there are none that I would completely rule out.
Shell is both the biggest and the safest, and offers good value and safe income for long-term investors.
BP is cheap but is still a recovery play. It has recently admitted that it would like to sell its stake in the Russian company TNK-BP, but doing so profitably may be difficult and will leave BP with shrinking reserves, unless it invests heavily in new resources elsewhere.
Across the Channel, Total seems to offer very good value. It's very profitable and is currently adding to its reserves at a strong rate. Total also offers a higher yield and a lower EV/boe cost than Shell, adding to its appeal. It lacks Shell's size, however, which might affect its ability to invest in the biggest projects.
Repsol still looks too expensive to me, and I suspect that it has further to fall. Its small size could even make it vulnerable to a takeover bid, but it does have some very high quality assets that could fuel growth over the next few years.
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Further investment opportunities:
> Roland owns shares in Royal Dutch Shell but does not own any of the other shares mentioned in this article.
