Consider These Oil Stocks In Place Of BP

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Oil spills happen and governments and environmentalists respond. And they should respond since these events are very nasty. The net result for stock investors is that issues and regulation are becoming a bigger part of the energy business.

As investors we have to ask if companies seeing increasing legal and regulatory pressure are sufficiently cheap enough that we would ignore these hurdles. If these stocks are not cheap enough, then investors we should refuse to buy them.

BP Ban and is Competitor Boon

The U.S. Environmental Protection Agency imposed a temporary ban on BP (NYSE: BP) from new U.S. government contracts after BP pleaded guilty to criminal charges pertaining to the Gulf of Mexico oil spill two years ago.  This disaster killed eleven people and grew into the worst environmental disaster in U.S. history.  BP claims it has since adopted stringent standards for deepwater drilling which exceed regulatory requirements.

In a plea bargain deal with the Justice Department, BP agreed to pay $4.5 billion to resolve securities claims and end all criminal charges related to the Gulf explosion. BP’s lawyers did not anticipate any government bans. The suspension will put a mark on BP’s record and may give an edge to its competitors for future federal contracts. Tommy Beaudreau, the Interior Department’s Bureau of Ocean Energy Management Director, said, “That suspension applies only to new contracts with the federal government.”

This ban is a big deal. Bloomberg data revealed BP as the biggest petroleum supplier for the Defense Department, capturing about $1.35 billion in contracts in 2011 and $1.02 billion in 2010.

Under a ban, BP won’t be able to bid on two planned auctions for Gulf drilling next year.  Washington-based Project on Government Oversight general counsel Scott Amey said, “If I were a competitor, I would definitely play the suspension up.” The Defense Department may source more fuels from its other suppliers: Kuwait National Petroleum, Valero (VLO), Chevron (NYSE: CVX), and Royal Dutch Shell (NYSE: RDS-A).

BP is engaging the EPA in hopes that it can lift the suspension and the company hopes that a resolution can be reached by the first quarter of 2013. Not everyone thinks this is likely: Public Citizen’s Energy Program Director Tyson Slocum feels that BP should be banned for five years, the probation’s duration received in connection with the plea bargain. For comparison, a suspension imposed by the U.S. Air Force on Boeing in 2003 was lifted by 2005.

Which company could be banned next?

Oil and gas operations are enormous and sometimes lead to spills and disasters. This is not a problem unique to BP or to Exxon. Yes, companies can try to be safe, but ultimately these operations involve flammable resources in the wilderness.

Most recently, the U.S. Coast Guard is observing Royal Dutch Shell’s floating oil drilling ship, Kulluk, that ran aground December 31st on the coast of Sitkalidak, a remote Alaskan island about 60 miles southwest of the town of Kodiak.  Due to difficult weather conditions, authorities did not send people to board the rig.

These harsh Arctic weather and sea conditions are the reasons why environmental groups had been calling for the federal government to stop drilling in the Arctic Ocean. Shell had been fighting lawsuits from environmental groups like “The Wilderness Society” in its efforts to drill for oil in the Arctic Ocean and has already invested $4.5 billion in offshore leases and equipment.

Initial Coast Guard inspection flight over the rig showed no visible signs of a spill. The Kulluk contains around 139,000 gallons of ultra-low-sulfur diesel and 12,000 gallons of hydraulic fluid and lube oil on board. Winds of over 70mph and 40-foot swells are hampering about 250 personnel involved in the salvage operation.

No drilling operation was involved when the grounding incident happened, thus no threat of a crude oil spill should be expected. In a statement released January 3rd, Shell said, “We quickly mobilized experts to respond to this situation.  The Shell emergency response assets and contingencies that were deployed over the last four days represent the best available in the world.”  After drilling in the Beaufort Sea off the coast of Alaska, the Kulluk was en route to Seattle for repairs when Shell’s towing vessel Aiviq reported that its line to the Kulluk was cut in heavy seas. Aiviq subsequently recaptured the floating rig but the former also went adrift, its engines stopped running due to contaminated fuel, forcing Kulluk’s crew to evacuate as a precautionary measure.

Another Shell ship, the Nanuq – equipped to contain oil spills – has joined the Aiviq in towing the Kulluk.  The company has mobilized available resources and dispatched two more ships, a tug named Guardsman and a 47-foot skimming vessel named Klamath, to help in the recovery efforts.

Shell and the U.S. Coast Guard both promised to inquire on why the tow boat lost control of the rig. The company’s Operations Manager for Alaska Sean Churchfield said, “There will be an investigation into the cause of this incident once we have the situation under control.”

Shell canceled its Alaskan drilling operations in September due to damage in a dome designed to capture underwater spill.  With its other drilling vessel – the Noble Discoverer – due for repairs, the company’s plan to resume drilling after the ice melts later this year, may not push through.

Nobody wants these disasters to happen, but they sometimes do. It is foolish to think that they couldn’t happen to any energy company with large operations.

Valuation

Many energy companies are cheap:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/B</span></strong></p> </td> <td> <p><strong><span>P/</span><span>FCF</span></strong></p> </td> <td> <p><strong><span>D/E</span></strong></p> </td> </tr> <tr> <td> <p><span>BP</span></p> </td> <td> <p><span>BP</span></p> </td> <td> <p><span>7.92</span></p> </td> <td> <p><span>0.37</span></p> </td> <td> <p><span>1.18</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.42</span></p> </td> </tr> <tr> <td> <p><span>MPC</span></p> </td> <td> <p><span>Marathon Petroleum</span></p> </td> <td> <p><span>8.34</span></p> </td> <td> <p><span>0.26</span></p> </td> <td> <p><span>1.85</span></p> </td> <td> <p><span>15.15</span></p> </td> <td> <p><span>0.29</span></p> </td> </tr> <tr> <td> <p><span>RDS-B</span></p> </td> <td> <p><span>Royal Dutch Shell</span></p> </td> <td> <p><span>8.45</span></p> </td> <td> <p><span>0.48</span></p> </td> <td> <p><span>1.22</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>NA</span></p> </td> </tr> <tr> <td> <p><span>CVX</span></p> </td> <td> <p><span>Chevron</span></p> </td> <td> <p><span>9.06</span></p> </td> <td> <p><span>0.9</span></p> </td> <td> <p><span>1.63</span></p> </td> <td> <p><span>333.75</span></p> </td> <td> <p><span>0.09</span></p> </td> </tr> <tr> <td> <p><span>XOM</span></p> </td> <td> <p><span>Exxon Mobil</span></p> </td> <td> <p><span>9.39</span></p> </td> <td> <p><span>0.83</span></p> </td> <td> <p><span>2.43</span></p> </td> <td> <p><span>36.53</span></p> </td> <td> <p><span>0.07</span></p> </td> </tr> <tr> <td> <p><span>IMO</span></p> </td> <td> <p><span>Imperial Oil</span></p> </td> <td> <p><span>10.02</span></p> </td> <td> <p><span>1.17</span></p> </td> <td> <p><span>2.35</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.09</span></p> </td> </tr> <tr> <td> <p><span>TSO</span></p> </td> <td> <p><span>Tesoro</span></p> </td> <td> <p><span>10.18</span></p> </td> <td> <p><span>0.18</span></p> </td> <td> <p><span>1.36</span></p> </td> <td> <p><span>11.74</span></p> </td> <td> <p><span>0.36</span></p> </td> </tr> <tr> <td> <p><span>COP</span></p> </td> <td> <p><span>ConocoPhillips</span></p> </td> <td> <p><span>10.76</span></p> </td> <td> <p><span>1.15</span></p> </td> <td> <p><span>1.53</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.45</span></p> </td> </tr> <tr> <td> <p><span>OXY</span></p> </td> <td> <p><span>Occidental Petroleum</span></p> </td> <td> <p><span>10.97</span></p> </td> <td> <p><span>2.68</span></p> </td> <td> <p><span>1.6</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.19</span></p> </td> </tr> <tr> <td> <p><span>HES</span></p> </td> <td> <p><span>Hess</span></p> </td> <td> <p><span>12.34</span></p> </td> <td> <p><span>0.5</span></p> </td> <td> <p><span>0.91</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.38</span></p> </td> </tr> <tr> <td> <p><span>MRO</span></p> </td> <td> <p><span>Marathon Oil</span></p> </td> <td> <p><span>12.55</span></p> </td> <td> <p><span>1.43</span></p> </td> <td> <p><span>1.25</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.36</span></p> </td> </tr> <tr> <td> <p><span>MUR</span></p> </td> <td> <p><span>Murphy Oil</span></p> </td> <td> <p><span>12.75</span></p> </td> <td> <p><span>0.42</span></p> </td> <td> <p><span>1.23</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.12</span></p> </td> </tr> </tbody> </table>

BP is cheaper than most of the stocks on this list when considering price-to-earnings, price-to-sales, and price-to-book multiples. Even better, there are plenty of alternative stocks that are similarly attractive and have not been banned by the U.S. government. For this reason, investor should consider Royal Dutch Shell and Hess (NYSE: HES) instead. Hess trades at a low price-to-book ratio and a low price-to-sales ratio. Royal Dutch Shell trades at a low price-to-earnings ratio and a low price-to-sales ratio. There is no reason to choose BP since these other energy companies are cheap based on valuation and have not been banned.


BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Chevron Corp. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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