Still in an Oil Spill Haze

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

After three years, BP (NYSE: BP) is still feeling the impact of its massive Gulf of Mexico oil spill. The haze is clearing, but the company isn't out of the fog just yet. Investors have better options in the oil and natural gas space.

Lingering effects

Three years ago, the disastrous oil spill at the Deepwater Horizon was major news for weeks. It seemed as if nothing that was being done could stop the oil leaking from the well. The impact on the water and the U.S. coastline was visibly disturbing.

The immediate company impact was a severe sell off in BP shares. Then came the cleanup costs and legal disputes. While the company has come to some settlements, totaling around $10 billion, it isn't out of the woods just yet. For example, as the three year anniversary approached, a slew of new lawsuits were filed. And then there are fines that have yet to be meted out. The costs aren't going to go down from here.

A changed company

To help pay for these costs, BP has sold assets. It didn't have much of a choice. These sales have altered the company's makeup. It has also pushed BP toward a more aggressive investment stance. Note a recent deal in Russia, a country not known for treating outsiders particularly well.

These risks have resulted in a moribund share price and an elevated dividend yield (over 5%). However, the risk/return profile probably isn't worth it for most investors. Simply put, there are better options.

Gas is a drag

Royal Dutch Shell (NYSE: RDS-B) is one of the largest oil and natural gas companies in the world, with a brand as recognizable as industry giant ExxonMobil. Shell's business spans from pulling oil and gas out of the ground, to refining, to filling automobile gas tanks.

The reference to Exxon is purposeful because both companies have moved aggressively into the domestic natural gas space. Shell has a lot of experience with natural gas in Europe. The problem today is that new drilling methods have turned natural gas from a big opportunity into a drag on results because U.S. natural gas prices have collapsed.

Both Exxon and Shell expect natural gas to supplant coal as the number two energy source in the near future, so it is likely only a matter of time before this investment turns into a winner. With a dividend yield of over 5% and lacking the legal headaches of BP, Shell probably has the best risk/reward profile in the oil and gas sector.

French giant

Total (NYSE: TOT) is an energy giant hailing from France. Although it isn't as well known in the states as Exxon, Shell, or BP, it is a big player in Europe and has operations spanning the globe. Right now, its European business is a drag on results, since many countries in the region are struggling with economic weakness. While there's no telling when Europe will finally turn the corner toward a prolonged recovery, Total has the financial strength to stick around until it does.

Moreover, the company has a strong position in the chemicals industry. That's something of an unrecognized gem that should continue to support long-term performance. Management has also been investing heavily to find new reserves. Although it fell slightly short of a 100% replacement rate last year, the average between 2010 and 2012 was 136%. From 2007 to 2009, the average replacement rate was just 75%. Clearly, the company is moving in the right direction.

Like BP, Total has deals with difficult countries, like Russia. However, Total has a long history of dealing with such nations and has proven adept at keeping such relationships positive. A nearly 6% dividend yield should be ample compensation for the company's European exposure.

Foreign oil

There's no doubt that owning Exxon is a relatively safe bet in the oil and gas industry. However, it also means a low yield. BP offers a relatively high yield, but the risks it faces are uncertain and large. A better option is to look at Shell or, for those with a slightly more aggressive stance, Total.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). 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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