BP plc (ADR) (BP), TOTAL S.A. (ADR) (TOT): Why I’m Bullish on European Oil

The oil industry seems to be constantly undervalued. Many of the large companies in this space produce massive amounts of revenue and trade at low multiples. However, there are still ways to identify companies that I feel can outperform American giants such as Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX).

Three European oil companies, all of which trade at even greater discounts when compared to industry competitors, are set up for long-term success all the while returning 3%-plus in dividend yield back to shareholders. These three companies are BP plc (ADR) (NYSE:BP), TOTAL S.A. (ADR) (NYSE:TOT), and Statoil ASA (ADR) (NYSE:STO).

BP is a name that everyone is all too familiar with. When people think of BP, their minds are still fixated on the Gulf of Mexico disaster that occurred more than three years ago. In total, BP has paid restitution in excess of $40 billion for this catastrophe, and is well on its way to putting the event in its rear view mirror.

BP plc (ADR) (NYSE:BP) has had continued success despite the massive amount of expenses related to settlements and litigation. This is a result of its ability not only to bring in new revenue from additional projects but also to increase operating effectiveness in ongoing ones. The company’s growth prospects look bright, as BP looks to start at least 15 new projects in the US alone by 2014. It is also investing in the modernization of its refinery programs.

These endeavors will help BP continue to grow, and most importantly the increase in operating effectiveness will help the company to expand its profit margins. BP plc (ADR) (NYSE:BP) also recently divested its position in the joint venture TNK-BP, resulting in a nearly $12 billion payout in cash and stock, $8 billion of which the company will use to buyback shares.

I would consider BP to be heavily undervalued. The company currently trades at 7.9 times forward earnings with a 0.4 price-to-sales ratio, both of which are below that of Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM). BP also pays out $2.16 (5.3%) per share annually with a very manageable payout ratio of 55%. I would look to accumulate shares of BP plc (ADR) (NYSE:BP) now with a long-term price target of $50.

Vive la France

TOTAL S.A. (ADR) (NYSE:TOT) is another large European oil producer (based out of France) that operates in both upstream and refining operations and develops petrochemicals. Total’s performance is more tied to growth than the other two oil producers that we will evaluate.

The company just delivered outstanding Q1 2013 results that truly highlight how effective the French company is at generating revenue. These results revealed revenue growth close to 30% vs. the industry average of just 1%; net income growth of 27%; operating cash flow growth of 193% vs. the industry average of just 21%; and EPS growth of 36%.