Royal Dutch Shell plc (ADR) (RDS.A), BP plc (ADR) (BP): Top Integrated Oil Companies Based on Valuation

Integrated oil companies have underperformed the market over the past five years and in a way, that is what Kevin Holt of Invesco Comstock Fund likes about them. In an interview on CNBC, the analyst reiterated his long position on Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and BP plc (ADR) (NYSE:BP) as some of the stocks with a huge upside, going forward. Kevin Holt mentioned that relative to market the stocks of these companies are trading cheaper in terms of price to book value ratio.

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is one of the stocks that Holt is keeping a closer watch on, despite selling some of its assets as one of the cost cutting measures of getting rid of non-core assets. Royal Dutch Shell plc (ADR) (NYSE:RDS.A) according to the analyst has excess capacity in terms of European refining. The company currently boasts of a 4% return on capital with a huge growth potential on the upside.

“[…] I am not a growth investor, but Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has a 4% return on invested capital, if you are a finance guy you are like, that is not an acceptable return. The stock just counts too. So if they could just run rate this profitability level, we get 40% upside. If they can get the industry average, we can get about 70% upside,” said Mr. Holt.

BP plc (ADR) (NYSE:BP) despite facing scandals in the past and having been forced to rationalize its assets is also under the keen watch of MR. Holt. The stock is inexpensive at 1.2x book-value essentially discount value, just like Royal Dutch Shell plc (ADR) (NYSE:RDS.A). Political instability continues to be a major concern as it always causes  oil prices to spike, positively affecting the stock in the short-term but with huge repercussion in the long-run.

“We have 3.2 million   barrels a day that come out of Iraq, most of it is in the south. If you do get disruptions, prices are going to spike, which will be great short-term for the stocks, but horrible for the stocks long-term and horrible for the world economy because it is going to drive us into recession,” said Mr. Holt.

Disclosure: none