Why Aren't You Investing in Oil?

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

Oil prices rose sharply in response to global supply concerns in the Suez Canal in Egypt. However, things seem to have gone back to normal since the army has control of the country and is not likely to allow any disturbance gone unpunished. Therefore, I would expect prices to fall back to high $90s in the interim. Weaker prices may push down these stocks to lower levels, and investors should reevaluate the investment prospectus to determine if it is time to bail out.

I like good dividend stocks!

ConocoPhillips (NYSE: COP) is an independent energy company focused on exploring, developing and producing crude oil and natural gas globally. It trades with a price-to-earnings ratio of 11.9, well below the industry’s average of 97.1. Also, its debt-to-equity ratio of 0.4 is below the industry’s average of 0.5.

In the last quarter, the company reported revenue totaling $14.6 billion, down from $16.0 billion for the same period last year. Its net income also declined to $2.1 billion, or $1.73 per share, from $2.9 billion, or $2.27 per share. Its cash from operations rose by 15% to approximately $4.2 billion.

ConocoPhillips ended the quarter with $1.3 billion in free cash flow, which brings the possibility for dividend hikes in the future. The dividend payment rose by 45% to $0.69 per share. Also, the company may bring capital appreciation to its investors by implementing share repurchases.

The decline in revenue was partly due to the company's portfolio optimization strategy. Revenue from the company's stake in Kashagan, an oil-producing field, as well as from its Algeria and Nigeria businesses was reported as discontinued operations.

Further, the company has received official notification from the government of Kazakhstan to exercise its right in acquiring Kashagan, an oil production facility located in the North Caspian Sea. ConocoPhillips is expected to receive $5 billion as compensation. This sale aids the company’s asset-disposition program aimed at optimizing the portfolio and bringing growth in cash margins.

ConocoPhillips is optimizing its production portfolio in an effort to increase its operating margins. The company may be even played as an income stock.

Here comes another dividend monster

Seadrill (NYSE: SDRL) is often sought by dividend-pursuing investors due to a juicy yield of 8%. The company is an offshore-drilling contractor that provides drilling and well services. Its fleet is designed to work in shallow water, mid-level water and deepwater areas. The company trades with a P/E of 18.0, below the industry’s average of 21.8.

According to its most recent earnings report, revenue rose by 30% to $1.3 billion, but net income remained unchanged at $405 million. Its cash from operations declined slightly to $423 million, but its free cash swung from an outflow of $84 million to an inflow of $41 million.

A free cash inflow suggests that the company is in good standing to meet its dividend payment obligations. Seadrill has been constantly hiking its dividend offer since the inception of the payout in 2007. The last dividend hike occurred during the first quarter of 2013.

The company is undergoing a strong expansion plan. It has entered into a new contract for the construction of two high-specification jack-up drilling rigs at the Dalian Shipbuilding Industry Office in China. The ships are expected to be delivered during the fourth quarter of 2015. The expansion of its fleet may bring higher revenue starting in the second half of the decade.

Seadrill has also been awarded a contract by Petroleo Brasileiro (ADR) (NYSE: PBR), or Petrobras, in conjunction with SapuraKencana to charter and operate three Pipe Laying Support Vessels. The contract is for a period of eight years with an extension option for another eight years. It is expected to commence in mid-2016. The total revenue potential for this contract is estimated to be $2.6 billion.

Lastly, the company has secured a new contract for the LT-Super 116E jack-up rig “West Freedom” in Venezuela. The duration of the contract is 30 months, with an extension option of six months, and the potential revenue is estimated at $222 million. The West Freedom rig is currently operating in Qatar, and it is expected to be operational in Venezuela in late 2013.

Overall, the company is securing new contracts on a regular basis, and it is meeting the strong demand by acquiring new rigs. Its modern fleet may enable the company to obtain more contracts in the near future. Hence, I believe this is a perfect growth stock, which also offers a nice dividend.

Speaking of Brazil…

Petrobras operates as an integral gas and oil company in charge of exploration, production, refinement, transportation and even import/export activities in Brazil. The company operates with a price-to-earnings ratio of 8.9 compared to the industry average of 8.7. Its revenue in the last quarter almost doubled to $72 billion, and its net income rose by 50% to $7.6 billion, or 1.18 per share.

Its cash from operations almost doubled to $14.8 billion, and its free cash flow jumped from $3.2 billion to $14.8 billion. The 4% dividend payment should not be in danger as long as the free cash flow remains strong. The dividend has been hiked on a continuous basis, and investors should expect a jump in the interim.

Petrobras' production is increasing, and I believe revenue should continue to grow. Production in the Santos Basin Nordeste pre-salt region started in June. The platform is expected to process up to 120,000 barrels of oil per day and 5 million cubic feet of gas per day. Peak production is expected for the second half of 2014.

The company will also develop new rigs in the pre-salt basin in conjunction with Seadrill beginning in 2016.

In brief, Petrobras is expanding operations offshore in the pre-salt basin, and its revenue should increase in the second half of the decade. Investors may observe capital appreciation in the form of dividends, and with a strong free cash flow, dividend hikes should be expected in the interim.

For these reasons

These companies offer an excellent investment prospectus, and they fit well in growth or income-oriented portfolios. I do not expect oil prices to fall to the low $90s in the near future due to a strong demand, and revenue for these companies may jump considerably in the third quarter of 2013.

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Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro S.A. (ADR) and Seadrill. The Motley Fool owns shares of Seadrill. 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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