Energy Values Lie Across the Pond

 | Sep 06, 2012 | 3:00 PM EDT
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Today's announcement of bond buying programs put into place by Mario Draghi and the European Central Bank (ECB) are not entirely news: We knew that another program of central bank support of sovereign paper was coming. And doomsayers will argue that the devil lies in the details of all of these efforts: What kind of prerequisites will be required of troubled countries such as Spain and Portugal in order to receive direct loans?

But here is the immediate bottom line: Support keeps on coming. And I have continued to watch some energy stocks leveraged to the European malaise that remain super cheap in light of continuing ECB and International Monetary Fund (IMF) support: French giant Total (TOT) and Italian integrated Eni (E).

We have seen that energy stocks have suffered in the early part of the year and the benchmark energy indices have fallen well behind the S&P 500. But since the end of June, energy has done a tremendous job of catch-up, with some stocks moving farther than I thought they should. Part of the big moves in large multinational integrated stocks in Exxon (XOM), Chevron (CVX), ConocoPhillips (COP) and others have been related to their dividends and, of course, the big move in oil prices -- but not related to either increasing production or new projects.

But the European multinationals have had even further to go to try and catch up. One major trend of strength in the U.S. markets has been the investor flow of funds out of European issues and into American names. In energy, there is really little reason to greatly prefer American exploration-and production (E+P) names to European multinationals. That is, there's no reason to prefer them unless you believe a currency disaster is coming ,like, um, you know, a euro breakup.

So there is the function of the trade: If you believe that the ECB and IMF and German Chancellor Angela Merkel will keep it all together in Europe, then stocks such as Total and Eni represent some really good value still -- despite the better relative value that they presented just one month ago:


Source: Yahoo! Finance


I could talk about Total's forward looking investment plans and its strong commitment to liquefied natural gas (LNG) and give a long comparative evaluation of the company compared to other multinationals, but there is really no need. If you believe as I do that the euro is safe for at least another year, then the relative value is there to be bought -- with a tasty 5.7% dividend to boot.

Eni represents the same kind of value, although the stock admittedly far more volatile and less reliable as a long-term play. I still believe that much of their fate lies in North Africa and how that plays out over the next two years, yet the stock is trading much like Total -- correlated to euro news flow.

Either way you go, you are admittedly at the mercy of that news flow -- today's Draghi statement has clearly enlivened both stocks: Total is up more than 3% and Eni has soared more than 4% on the day.

I think both of these names have more room to run. If you're looking at adding dividend producing multinational E+P companies to your portfolio, I'm saying the better values lie across the pond right now.

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