I remain quite bullish about the outlook for oil companies over the next couple of years. Among many other things, I see continued demand growth, limited spare production capacity, declining production rates in key regions such as the North Sea, and the uncertain political environment in many oil-producing nations. Just a few weeks ago, for example, I recommended that investors take another look at Motley Fool Income Investor pick Total SA (NYSE:TOT).

That said, I'm aware of the growing chorus of concern regarding the rather rapid drop in the price of oil. Prices have fallen nearly 25% from their highs this past July, and they've been lollygagging around the $60/barrel range for a while now. That's why I believe it might be prudent for investors in the energy sector to weight their holdings toward the major oil players in the near term -- PetroChina (NYSE:PTR), ExxonMobil (NYSE:XOM), and BP (NYSE:BP) all spring to mind -- on account of their lower risk profiles, diversified earnings streams, proven ability to pay ever-increasing dividends, and generally moderate valuations.

On the flip side, one major oil company I would urge investors to avoid is Repsol YPF (NYSE:REP), Spain's largest integrated oil and gas company, which fails to measure up to a number of standards. In simple terms, Repsol has one of the highest risk profiles among the majors because of its significant exposure in Argentina and Bolivia. It also lacks a certain amount of credibility as a result of the company's large downward revision of its estimated reserves earlier this year, and it carries a rich multiple -- it trades at a slight premium to stalwarts PetroChina and BP but offers a yield of less than 2%.

Let's address each of these issues, shall we?

Argentina and Bolivia exposure
It's not shocking that Repsol YPF has so much exposure to the Bolivian and Argentine markets, since the company in its present form was created by Repsol's 1999 acquisition of YPF S.A., the former Argentine national oil company. While I'm sure the merger made sense at the time (and probably will so again in the future), the political and economic climates have changed in both Argentina and Bolivia.

In Argentina, President Nestor Kirchner leads a populist government that has imposed government price controls on fuel prices -- which have been held flat for more than a year, with the controls likely to be extended. The government has also imposed limits on natural-gas exports and is planning to ramp up the development of Enarsa, a state-owned oil and gas company first established in 2004.

The situation in Bolivia is even worse. The country's newly elected leftist president, Evo Morales, has -- for all intents and purposes -- nationalized the country's oil and gas properties. While "negotiations" are ongoing, somehow I don't see an outcome that could be regarded as remotely positive for oil and natural-gas companies that have operations in the Andean nation.

While companies as well-diversified as ExxonMobil might be able to shrug off these issues, I don't think Repsol can be so sanguine. As of Dec. 31, 2005, Repsol's properties in Argentina, Brazil, and Bolivia represented approximately 77% of the company's proven reserves in crude oil and more than 63% of its natural-gas reserves.

In a word: Ouch.

Some lack of credibility
I don't want to kick a company when it's down, but I believe that Repsol's communication skills have also proved somewhat lacking. While the extent of the regulatory and political problems that arose in Argentina and Bolivia over the past couple of years might have exceeded management's worst-case expectations, investors must still be stinging over the January announcement that Repsol had to cut its estimated proven reserve base to 3.3 billion barrels of oil and oil equivalents (boe) at the end of fiscal 2005, a staggering 32% decline from the 4.9 billion boe reported in 2004. This means that Repsol will run through its proven reserves (based on its current rate of production) in 9.4 years, one of the lowest levels of the majors.

Valuation
Finally, there's the issue of valuation. Repsol currently trades at roughly 12 times fiscal 2007 estimates, an 8% premium to larger players such BP and PetroChina, which offer investors better production growth profiles, carry much less political risk, and pay significantly higher dividends.

Hang up the nozzle
I know there's some speculation that Repsol is an acquisition target, but I'm certainly not willing to bet a portion of my portfolio on that hope. I'd urge energy-hungry investors to look elsewhere among the sector to whet their appetites.

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Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than reading The Financial Times, rooting for the New York Giants, or pondering the vagaries of life (pretty unsuccessfully up to this point). He welcomes your feedback at mailto:elves1us@yahoo.com. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.