Integrated trio for growth & income

With the stock market continuing to surge, it has become more of a challenge to find stocks trading at attractive valuations. One group that recently caught our eye is the major integrated oil companies.  

Most of the stocks in this group have underperformed the S&P 500 Index over the past year, many by a significant margin. These stocks have the added benefit of paying relatively high dividends.

Although they may be market laggards at the moment, we like the long-term prospects for the big oil companies.  Demand for oil (and natural gas, which many of them produce in addition to oil) is likely to keep rising for the foreseeable future, particularly in the developing countries.  

And whether oil prices go up or down, the major oil companies always seem to find a way to grind out substantial profits. Overall, an oil stock or two can be a useful "anchor to windward" when a bear market eventually rolls around.

These three trade at attractive valuations and pay generous dividends.

BP (BP) is in the middle of a major restructuring that was initially triggered by the disaster at its Deepwater Horizon rig in the Gulf of Mexico. The company has been shedding substantial assets, ranging from the Gulf of Mexico to Russia.

In spite of large settlements relating to the Gulf disaster, management has maintained a strong balance sheet. After a brief hiatus, it reinstated the dividend in 2011 and recently raised it.

BP's strategy is to develop higher margined assets; recent successes include a major offshore gas discovery in India and a winning bid for offshore Brazilian properties.

ConocoPhillips (COP) has streamlined its business through a number of asset sales over the last decade.  Now the company is more of a pure play exploration company than most of the other majors.  The asset sales have allowed Conoco to strengthen the balance sheet, including the pay-down of some $6 billion in debt.  

This gives management the flexibility to pursue an active capital investment program while also providing value to shareholders via dividends and share repurchases.

Exxon Mobil (XOM), formed via the 1999 merger between Exxon and Mobil, is the world's largest independent energy company. Its activities are well diversified with oil & gas exploration/production accounting for 64% of 2012 revenues, refining/marketing 28% and chemicals 8%.

Exxon is currently the largest producer of natural gas in the U.S., and the bulk of its $38 billion annual capital spending budget is focused on further building its reserves.  The balance sheet is strong, cash flow substantial and management is well regarded.