Wow, Europe is imploding. During the last month, the previous spike in Spanish yields, poor economic data coming from the eurozone, and political uncertainty in countries such as Greece and France, as well as at the European Central Bank, has killed European equities.
Indeed, while the S&P 500 and its tracking exchange traded fund, SPY (SPY), has rallied nearly 20% from the lows of 2011, and stocks such as Apple (AAPL) are up over 30% in the last year, European equities have lagged most of the broader indexes by a fairly wide margin.
As we can see, while German and French stocks, and these country's index's tracking exchange traded funds, the EWG (EWG) and EWQ (EWQ), rallied hard after bottoming during the summer of last year, these indexes are back near the lows these markets put in nearly a year ago.
Still, while the European economic growth outlook remains bleak, given the fact that the U.S. economy continues to expand at 2-2.5%, and the ECB has initiated operation long-term refinance, given that most of the broader European index's are off over 30% in the last several months, I think it is worth looking at these markets for value.
Royal Dutch Shell (RDS.A) is a nearly 200 billion dollar integrated oil company headquartered in the Netherlands. The company recently reported a 16% increase in year-over-year earnings, showed a 56% increase in year-over-year operating income, and also reported that the company's net debt was down to below 10% of its equity.
While Royal Dutch Shell has had some recent issues with oil production in Iraq, the company has also seen a strong recent return on its nearly 20 billion dollar investment in Qatar's liquefied natural gas market, where production jumped 138%, and prices held up strong. Royal Dutch Shell also showed generally strong recent oil production numbers in the company's last earnings report as well. Royal Dutch Shell also gets less than 15% of the company's overall revenues from the eurozone.
Royal Dutch Shell pays out nearly 42% of its net income in dividends, nearly double what Chevron (CVX) and Exxon-Mobil (XOM) payout in dividends today. The company trades today at around 6x average estimates of this year likely earnings, while Chevron trades at around 7x an average estimate of this year's likely earnings estimates, and Exxon trades at nearly 9xan average estimate of this year's likely earnings estimates.
Seadrill (SDRL) is a 16 billion dollar drilling company that recently reported a nearly 8% rise in net cash generated from the company's operations. Sea Drill is headquartered in Bermuda, but ran out of Norway. The company currently pays a 7% dividend and recently raised its regular dividend from $.80 cents to $.82 cents, in addition to declaring a special dividend of $.15, after selling part of the company's shares in Malaysian Oil Service Provider, Sapuracrest.bhd., when that company was acquired.
Seadrill recently obtained a day rate of $650,000 a day, the highest day rate the company has received for its rigs since nearly 2007, and companies such as Transocean (RIG) have obtain day rates of over $700,000, of late. Seadrill also has 4 new rigs that the company ordered, which will increase the company's drilling fleet by nearly 8% in the next several years. The stock trades at around 10x an average estimate of next year's likely earnings.
ENI S.p.A. (ENI) is an integrated Italian oil company with a market cap of nearly 70 billion dollars. While ENI S.p.A. saw a recent drop in oil production because of the conflict in Libya, the company has consistently shown industry leading production growth of around 3% a year. ENI also has operations in significant operations in Asia, and positions in oil and gas fields in North America as well. The company does the vast majority of its business outside of the eurozone.
ENI has significant oils field in Central Africa and West Africa, where extraction costs are much lower because the oil is very close to the surface. Libyan oil can be extracted for as low as $2 dollars a barrel, and Libyan and West African oil tends to be the more sought after sweet crude. Saudi Arabia has nearly a $20 dollar a barrel extraction cost after they refine the country's largely heavier grades of crude to sweet crude. In addition to ENI significant position in Central and West Africa, the Italian government stayed out of the Libyan conflict, positioning its company's well to bid for future contracts.
ENI S.p.A. has also consistently raised its dividend by around 10% a year, and the company yields over 5% today. ENI S.p.A. shares trade at around 6x an average estimate of next year's likely earnings.
To conclude, while the eurozone may remain weak for some time, not all European companies are created equally. With the U.S. economy still expanding at 2-2.5%, fear levels much lower today than these concerns were at the height of the European debt crisis nearly a year ago, and most European markets having sold-off hard over the last month, long-term investors should be able to find nice value in strong European companies whose business models are not significantly leveraged to the European economy.