Pessimism Toward European Energy Stocks Rises Sharply

 | Mar 15, 2017 | 8:00 AM EDT
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How quickly things change in the space of energy. The latest wobble in the price of oil has led many investors to reassess their bets on a sector that has been plagued over the last couple years by fears that many companies will collapse under the weight of their debt.

West Texas Intermediate (WTI) crude stabilized around $48.50 a barrel this morning after Saudi Arabia reaffirmed it would stand by its production cut pledges. The Saudis' statement followed a week in which the price of oil plunged almost 10%. The drop came after OPEC's monthly report showed production in Saudi Arabia increased in February, sending the international Brent crude price below $50 for the first time this year. Brent went back to $51.60 after Saudi Arabia's statement, but worries linger.

In Europe, the Sentix institute's monthly survey of investors in the European energy space shows a sharp U-turn. "Within only a few weeks, investors' perception has turned upside down," Julien Mueller, an analyst at Frankfurt-based Sentix, said.

Investor sentiment in March fell to the lowest level recorded since 2002, with institutional investors in particular downgrading their expectations. For the first time in 12 months, investors also showed a pessimistic outlook on the energy sector, on average.

"Nevertheless, comparable sentiment drops yield positive sector performance within the following months, as such shocks are most likely an over-reaction," Mueller said.

In the U.S., Action Alerts PLUS, which Jim Cramer co-manages as a charitable trust, sees battered energy stocks as long-term opportunities. The same could be said about some European companies. Investors should start by looking for companies that have a reasonable debt burden, because interest rates probably have bottomed and interest expenses likely will be going up from here.

Screening the FactSet database for stocks in the European sector with a debt-to-equity ratio of 60% and earnings-per-share growth of more than 5% shows where the opportunities might be.

The biggest of the companies is Royal Dutch Shell (RDS.A) , the stock of which has lost 6.4% year to date on the London Stock Exchange. But with a dividend yield of around 7%, Shell long has been a stock to hold in a well-diversified portfolio.

Looking at the average target price that analysts have on Shell, at around £24.58 ($30.05) on the London Stock Exchange vs. the current price of around £22, there is at least some upside for this stock.

Another name on the list is French giant Total (TOT) , which year to date has fallen by 4.24%. It could be argued that it is relatively fairly valued, as it trades at a trailing 12-month price/earnings (P/E) multiple of 20.5, which is close to its five-year average of 20.1. Analysts have a target price of €51.76 ($54.86) on its Paris-listed stock vs. its current price of around €46.66.

Spain's Repsol (REPYY) is another big name. Year to date, the company actually has gained 6.7% and its current price is on target: €14.32 on the Madrid Stock Exchange, compared with its average target price of €14.35.

Even so, its current P/E of 12.3 compares with the five-year average of 27, so Repsol could be viewed as a bargain for investors willing to dig deeper into this company, the sales of which are projected by analysts to grow by around 28% to €44.4 billion in the fiscal year ending December 2017.

These are three of the better-known stocks on the list. Lesser-known and therefore riskier names include Russian giants Lukoil (LUKOF) and Gazprom (OGZPY) , as well as Greece's Motor Oil Hellas (MOHCY)  and Austria's OMV (OMVKY) .

The prospect of rising interest rates and weaker-than-expected oil prices could put a damper on energy stocks. But if sentiment turns out to be more pessimistic than warranted, their current weakness could be a good buying opportunity.

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