Libya's parliament, the General National Congress, has ordered the creation of a new military force charged exclusively with "liberating" oil ports from rebel factions. The Libyan Navy has also captured an oil tanker belonging to a United Arab Emirates company, charging the crew with "piracy" for loading at the rebel-held port of Es-Sider.
None of this is a huge shift for Libya, but is just the continued progression of unrest, which has cost the nation most of its oil production over the past year. In the last year under the Gadhafi regime, Libya produced 1.6 million barrels of oil a day. Last summer, despite a ton of foreign investment from companies like Eni S.p.A. (E 0.25%), that production was down to 1.4 million per day. Today, it is 230,000 per day, and still falling.
That's bad news for Eni, which has seen earnings misses on a regular basis and was banking heavily on production from Libya, which seems stalled for the foreseeable future. With Libyan production mostly heading to Europe, their loss could be the gain of other major producers in the European market.
Looking north
The port of Es-Sider was exporting oil benchmarked to Brent Crude, reflecting its Euro-centric marketing. Without that production, Brent production is likely to continue to trade at a premium. That's doubly true with other regional producing countries like Syria likewise seeing production drop on instability.
Since Brent Crude is sourced out of the North Sea, that's the most obvious place to look for benefit from Libya's production lag. Two major standouts here are Royal Dutch Shell (RDS.A) and Statoil (EQNR -1.87%).
Both are trading around 52-week highs, but are still quite reasonably priced, with Shell paying an impressive 4.7% yield and trading at just 14 times earnings. Statoil's dividend yield is a bit lower at 3.2%, but it is even more North Sea-focused, and is trading at a P/E of 12 with a stronger balance sheet.
Both of the companies should continue to perform well in this environment, though I like Statoil better both because of its large cash-on-hand position and because the company has wisely divested itself of a lot of its interests in unstable places like Libya. With so much oil coming out of political and military basketcases in the Middle East, I think a premium is warranted on production in rock-solid places like Norway.
The other bargain in Europe
Another producer with a lot of interest in Europe is Russia's OAO Lukoil (LUKOY), which has the second largest proven oil reserves on the planet, behind only ExxonMobil. Like Statoil, most of its production is in fairly stable political environments (in this case western Siberia).
Lukoil is also trading at an extremely generous discount right now, owing to the recent sell-off of the Moscow Exchange after Russia's deployment of troops in the Crimea. It is trading at 5.3 times earnings right now, a steal by any measure.
Ukraine is likely to remain a drag on foreign investment in the Russian market, but there is no reason to believe the tensions over the Crimea are going to have a major impact on Lukoil's bottom line, or that the European Union will ever agree to any sanctions that would cut their markets off from Russian oil they desperately need.
Panic selling of all things Russian means Lukoil is a tremendous bargain for those looking for exposure in Europe's oil market, and it deserves strong consideration, along with the other North Sea companies mentioned before.
