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3 Energy Companies for Value Investors

By Alexander MacLennan – Mar 23, 2014 at 6:00PM

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Even after a market rally, these major companies still trade at less than 10 times earnings.

Major energy companies typically fall into the category of blue-chip stocks for conservative dividend investors. While dividend investing can be a good approach to securing long-term gains, finding dividends and value can provide even larger gains for your investment portfolio.

Legal troubles
Perhaps no energy company has received more attention over the past few years than BP (BP -0.10%). In 2010, the fire and sinking of the Deepwater Horizon caused environmental damage to the Gulf Coast and massive legal liabilities for BP.

The British oil giant has paid out billions in legal claims, with more future payments expected. But through this, BP has managed to maintain an impressive level of financial stability. The company has embarked a program of strategic asset sales designed to raise funds to pay legal costs and return money to shareholders.

And returns to shareholders are quite impressive compared with its peers. BP's dividend comes in at 4.8%, higher than the dividends of ExxonMobil (XOM 0.15%) at 2.7% and Chevron (CVX 0.47%) at 3.5%. BP also stacks up favorably trading at a price-to-earnings ratio of 6.3, compared with ExxonMobil and Chevron, which both trade north of 10 times earnings.

While BP does have some increased legal risk, the massive size of its operations has ensured healthy profits and dividends for shareholders. Furthermore, BP carries a combination of low valuation and high yield, making it among the best buys in the energy industry.

Emerging markets slide
Last year was a rough one for emerging markets, and 2014 has done little to change investor sentiment. Among the biggest losers has been Petrobras Brazil (PBR -0.95%), which has lost more than 30% throughout the past year.

Being majority owned by the Brazilian government, Petrobras is subject to both political and economic risks. Oil production fell short of targets, dropping 2.5% year over year from 2012 to 2013. At the same time, the company has been subject to price controls as the Brazilian government tries to curb inflation.

Although this may look like a company to avoid, Petrobras does have some positives as an investment. The company expects to increase production for 2014 and increase its refining capacity 50% by 2020.

From a valuation perspective, Petrobras also looks attractive. The current P/E ratio of 6.2 times is below the industry average, but the forward P/E ratio looks even more attractive at just over 5 times. One warning for Petrobras investors is that dividends can be unstable. However, if earnings can recover and grow, they should increase in the long term.

Russian discount
Since the Ukrainian crisis began, Russian stocks have been feeling the pain. But there is now a lot of value to be had for investors willing to assume the risks of Russian equities.

As I have mentioned before, I view Gazprom (OGZPY) as one of the most contrarian investments in the current market. The energy giant is majority owned by the Russian government and sells products that Western powers are considering leveling additional sanctions on.

For taking on these risks, investors can get a multibillion-dollar oil and natural gas producer for less than three times earnings. Gazprom has long traded at a discount to non-Russian controlled peers, but the discount has widened since the recent tensions began. A solution to the current crisis could be a major catalyst for Gazprom shares and could push them back closer to pre-crisis levels.

Value hunting
Just because the market rallied in 2013 doesn't mean all the value picks are gone. BP, Petrobras, and Gazprom all give investors the chance to invest in a major energy company at a valuation significantly lower than industry averages.

Alexander MacLennan has options on BP. The Motley Fool recommends Chevron and Petrobras. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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