Two Compelling European Oil Plays

 | Jul 01, 2013 | 2:00 PM EDT
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As a trader, you're looking for several fundamentals to start coming together to create a value in the market and give you a great investing idea. I've found more than a few reasons to put together a trade for two European oil companies that I believe are going to make some great strides in the next few weeks: BP (BP) and Royal Dutch Shell (RDS.A).

The oil trade has been a bit difficult to understand. All the other commodities have faltered, and gold and copper and the grains are finding lower levels, but oil has continued to hover very close to $100 a barrel. I highlighted the reasons for this in several other Real Money columns, but the bottom line is clear to me: Oil is going to be a strong storehouse of value in the second half of 2013, and all the price risk definitely continues to be on the upside.

But how can we find investments that take advantage of that trend? I've been an advocate of using oil stocks as proxies for oil price, even though I am a lifetime oil futures trader. The futures markets are not for the inexperienced investor, and the futures-based ETFs, such as the U.S. Oil Fund (USO), are some of the worst investments in the world.

I've recently given some interesting U.S. ideas on investing in a high and sticky oil environment, but for those who have a bit more risk appetite, some foreign markets have greatly lagged the U.S. and have far more room to run, should they begin their own bull market, as we have already done here for the past four years.

There are finally indications that the European Union is on a steadier road to recovery. Just yesterday, manufacturing purchasing managers' index reports from all of Europe made new two-year highs in most of the larger industrialized nations, including a 50 reading in Spain and a 49.1 reading in Italy -- yes, Europe is finally getting better.

Among the sure beneficiaries of improving European manufacturing will be European energy companies, which provide the life-blood of manufacturing and which have lagged the U.S multi-national integrated energy giants for several months:

BP vs. CVX
Yahoo! Finance
Yahoo! Finance

Here are charts of BP and Royal Dutch Shell against Chevron (CVX) shares over the last two years. Now, we could argue the relative value of Chevron compared with any other oil company, both U.S. and abroad, but I really believe the major difference for such a wide divergence between the U.S. majors and these Euro majors has been the relative malaise and credit risk that have held sway over the E.U. economies and that now appear to be beginning to break.

Since oil prices are strong and are far more likely to head higher, I consider both of these majors to be not just the best values in the mega-cap integrated space but the only values there. I wouldn't be holding any of the U.S. Big Three right now (Chevron, Exxon Mobil (XOM) and ConocoPhillips (COP)), despite rising oil prices.

But BP and Royal Dutch Shell? Since Europe is coming back, oil prices are rising and these two have a long way to go to catch up to the rest of the oil world, I want them both, and I am buying them right here.

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