With demand still relatively high for oil and gas, it's the integrated oil and gas providers that stand to benefit most going into 2012, analysts say. But what's the formula for success in the integrated oil and gas (IOG) market?

Integrated oil and gas companies are well positioned to capitalize on the growing demand across the globe for cheap energy supply. With huge merging middle classes in countries like India, Brazil and China, along with existing markets of ample size in the U.S. and Europe, integrated oil and gas right now is the largest industry in the energy sector.

Population Size of Emerging Middle Class Economies
  • World: 6,965,900,000
  • China: 1,339,724,852
  • India: 1,210, 193,422
  • Brazil: 190,732,964
  • Source: Wikipedia.org

The basic criteria for investing in integrated oil and gas companies is fairly compelling. Total market capitalization for the integrated oil and gas sector is $3.1 trillion, giving companies' enormous financial resources for investments in drilling, exploration, equipment and services.

In addition, the average price-to-earnings ratio on the sector is 10-to-2, and the average dividend yield in the sector is approximately 4% -- a number that is sure to attract skittish investors looking for some sign of stability in the financial markets.

But that's exactly what investors are looking for these days: huge, stable companies in a field where global demand is high and where companies have plenty of cash on hand to leverage that demand opportunity.

But as any seasoned Wall Streeter knows, the integrated oil and gas market is highly cyclical, and the idea is to purchase such stocks at the cusp of a breaking price cycle where prices are cheap and opportunity for price appreciation is high -- hopefully with solid dividend payouts.

Quotable

"Integrated oil and gas companies are weathering the latest economic slowdown better than most industries. As a result, many investors have begun to seek refuge in the industry."StockCall.com

That begs the question -- are we at the beginning of such a cycle right now? It's hard to say, especially in a year where oil and gas prices have experienced so much volatility.

Take, for example, the MSCI World Energy Index (Stock Quote: MXWOOEN.IND). On a year-to-year basis, the index basis has rose from 210 in October, 2011, to 280 in May, and then plummeted to 207 at the end of September 2011.

Or how about the iPath S&P GSCI Crude Oil benchmark exchange-traded fund? It entered 2011 at a share price of $24, before rising to $30 in May and settling back down to $20 in September (it’s at $19.97 at the beginning of October).

One key that Wall Street money managers use when gauging integrated oil and gas companies is to read the dividend tea leaves. In a word, stable dividends can be a useful tool in gauging long-term stock growth.

The following oil and gas stocks seem to offer a healthy dividend picture:
CompanyAnnual Dividend and Yield
Chevron (Stock Quote: CVX)$3.12 - 3.40%
ConocoPhillips (Stock Quote: COP)$2.64 - 4.20%
ENI (Stock Quote: E)$2.04 - 5.08%
PetroChina (Stock Quote: PTR)$4.54 - 3.80%
Royal Dutch Shell (Stock Quote: RDS)$3.36 - 5.40%
ExxonMobil (Stock Quote: XOM)$1.88 - 2.60%

Source: Yahoo Finance

The financial web site Benzinga.com rates the top four integrated oil and gas plays along those lines, i.e. large cap energy companies with a great dividend story. Here's how Benzinga ranks them:

1. Eni SpA -- ENI has a dividend yield of 5.80%. The stock is trading at about $35 per share. Italy-based ENI also has experienced a trading range of between $33.93 to $53.80 during the past year. The 50-day moving average is $37.64 and the 200-day moving average is $43.49. So when the stock is trading at $35, and has a solid dividend payout of $2 per share, that's one stock that might be at the front end of the affordability cycle. In fact, you can buy shares of ENI now for about the same price ($31) that it was trading at in the spring of 2009.

2. Royal Dutch Shell -- Royal Dutch Shell plc is trading at about $61 per share right now, with a dividend yield of 5.40%. Equity research from ShinesRoomOnline.com's David Shine says that Shell should benefit from a new drilling method that is "making oil fields in the Western United States accessible and could raise domestic oil production around 20% during the next five years." The financial website says that Shell is set for higher share prices as oil prices work their way back up toward mid-2011 levels--mostly based on high global demand. "Shell has been growing quickly as of late on the back of high oil prices," Shine says. "It is anticipated to post 20% earnings growth this year and 25% next year as prices continue climbing. While Q4 earnings missed by 12% due to weak refining margins and maintenance charges, many still believe Shell has a bright future."

3. Ecopetrol SA (Stock Quote: EC) -- EC boasts a dividend yield of 4.90%, and is trading at $40 per share. But the average analyst target share price is about $49 per share, suggesting plenty of room for growth. Analysts at the financial web site Seeking Alpha say that expected share price growth should rise by more than 16%.

4. ConocoPhillips -- With a dividend yield of 4.00%, COP was trading at $62 per share last week. But analysts say that Conoco is trading at about 20% lower than its 52-week high. Average estimated share price target is at about $80 per share, suggesting an upside of 30% or so for Conoco stock.

Nothing is ever etched in stone, but f these analysts are right, integrated oil and gas could be the place to be for the last quarter of 2011. The analysis isn’t complicated--just follow the share price trajectory (and the analyst upside estimates) and take a good look at those dividend yields.

Do that for a whole year and see what kind of oil and gas jewels you dig up.