Many retail investors looking to get into the energy sector will immediately gravitate to ExxonMobil or Chevron because those are often the only names they know (or at least the first names that come to mind). That a beginning investor wants to wade only into shallow waters is understandable. Why swim with sharks when you don't have to? Stability, for many, is the most important consideration.
But there are a good number of smaller oil companies out there that are just as stable as an ExxonMobil or a Chevron. These smaller companies sometimes offer unique value propositions on their own. Today I will introduce three lesser-known oil companies that offer things that the biggest names cannot.
Let's start with the national oil company of one of the cleanest, least corrupt countries in the world: Norway's Statoil (NYSE: STO ) . Statoil's market cap of almost $100 billion, while big, is significantly smaller than Chevron's $250 billion and ExxonMobil's market cap of nearly $450 billion. Yet, those looking for stability will find plenty of it in Statoil. Statoil has a strong balance sheet and an asset base underpinned by the best offshore oilfields in the Norwegian North Sea.
But Statoil is so much more than that. It is the biggest offshore driller in the world, with concentrations on Brazil, West Africa and Tanzania. With a global shift in oil production from onshore to deepwater, Statoil's viking-like offshore expertise means a lot. Statoil also has a respectable position in the Eagle Ford shale and a leading position in the Bakken Shale, which is right now a major source of production growth for so many oil companies. Exxon and Chevron, meanwhile, have already missed out on the shale revolution. Not surprisingly, Statoil also sports an impressive organic reserve replacement ratio of 147%. Last but not least, Statoil's 4% dividend yield is substantially greater than that of ExxonMobil or Chevron.
Some might call Denbury Resources (NYSE: DNR ) a 'boring' stock, but boring can be a good thing for many of us. Denbury is just a $6 billion company, but its strategy is one-of-a-kind. In a nutshell, Denbury is the expert at CO2-injection oil recovery, which is a technique used on old oilfields where the traditional pumping method has already extracted as much oil as it can. By injecting CO2 into old oilfields, all of which are in the United States, Denbury brings old fields back to life.
In the above chart we can see the excellent results of such a business model. Because Denbury focuses only on already-mapped oil fields, where oil can be found at relatively shallow depths, Denbury has a rock-bottom cost of production, and this has led to an amazing $70 margin per barrel of oil produced. Like Statoil, Denbury also pays a dividend. Currently Denbury yields only 1.5%, but management will boost that payout this year. Based on today's stock price, next year Denbury will yield a solid 3%.
And then there's Occidental Petroleum (NYSE: OXY ) . Occidental Petroleum was founded by legendary businessman Armand Hammer in the 1920s. Its market cap is a much larger $76 billion. Today, the company is the largest producer in California and West Texas, and it has a huge business in the Middle East.
Here is what makes Occidental exciting: The company is spinning off business units to unlock value. Management already announced that it would split up its highly profitable California business from the Texas 'core,' with the high-growth Bakken acreage most likely going with the California unit. In addition, Occidental will probably be selling its Middle East assets in a piecemeal fashion. After the dust settles, Occidental will still be left with a large CO2-injection position in the Permian. This will act as a cash cow to fund development of horizontal drilling in the same basin, where Occidental has 2 million acres on which to do so.
Bank of America energy analyst Doug Legette, in a report published last summer, wrote that the sum of Occidental Petroleum's parts, when accounted for separately, should be worth around $150 per share. Shares currently sit at around $96. While you wait, Occidental offers a 3% dividend.
There are other 'blue chip' choices out there besides the ones most investors know best. Statoil, Denbury, and Occidental Petroleum are each great alternatives to ExxonMobil and Chevron because each company is stable, yet each offers something the bigger names cannot.
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