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European Oil Majors Are Cheap And Attractive Inflation Hedges

Jun. 08, 2020 8:05 PM ETCEO, COP, CVX, LUKOY, PCCYF, XOM, BP, SHEL, TTE7 Comments
Scott Morton profile picture
Scott Morton


  • Indebted oil companies win on two fronts when inflation kicks in - a real decline in the value of debt owed, and price appreciation of their output.
  • European oil companies are preferred due to relative valuations in comparison to the US oil majors.
  • European capital markets are preferred to developing capital markets due to the risks of fraud, capital controls, and outright confiscation.
  • Short- and long-term demand uncertainty is undue. Oil will remain a major component of global energy demand.

In my previous article, I wrote about why investors should short (or at the very least be cautious of) bonds, specifically US treasury bonds, provided the underlying risks of inflation. Along the same lines of macro-economic thinking, I want to offer investors another asset class they can invest in to hedge against inflation: Equity securities of European oil majors.

To me, oil companies are a superb way to hedge against inflation for two reasons. First of all, when inflation is positive, the real value of debt owed declines, which effectively represents a wealth transfer from creditors (bond holders) to debtors (equity owners). If you know that there will be significant inflation in the future, the best investment you can make is a leveraged one where the cost of debt is lower than the expected rate of inflation. When viewed in this manner, the staggering amount of corporate debt issuance at record low rates since 2009 can actually be viewed as logical and perhaps even, dare I say, smart?

The second reason to like oil companies as an inflation hedge is that inflation inevitably means an appreciation in the price of oil. This will lead to increased revenues for oil producers and a drastic expansion in profit margins. The nature of this profit margin expansion is due to the fact that currently inflated revenues will be generated using historical capital expenditures that were paid for with currency that is now depreciating in value. GAAP and IFRS standards of accounting are based entirely on nominal prices.

So, if oil companies are a great way to hedge against inflation, then why do I advocate for European oil companies in particular? First of all, European oil companies are cheaper investments than their global counterparts. This is demonstrated below by my favourite valuation metric EV/EBITDA across three European companies: BP (

This article was written by

Scott Morton profile picture
hard assets, gold and silver Stocks can be a great investment (and will be in the future) at the right priceI expect the valuations to contract in the medium term.

Analyst’s Disclosure: I am/we are long TOT, BP, RDS.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am long these stocks through the iShares Stoxx Europe 600 Oil & Gas ETF (ISIN: DE000A0H08M3) as opposed to individual stock picks.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (7)

TheJollyGreenMan profile picture
Amazing, for me the attraction of OGZPY is that it is out of the clutches of those crazy and nutty Dems taking a knee fools in the USA.
willpetty profile picture
BP pays dividends historically larger - might that affect p/e?
Does not LUKOY have the added incentive of currency appreciation against the USD?
Rand Walker profile picture
Worth remembering what the "T" stands for in EDITDA.
bluescorpion0 profile picture
not if they've all escaped offshore to some tax free island or little country to base their global operations out of.
secorewb profile picture
The American companies debt is in dollars and oil is priced in dollars, so that reduces risk and your scenario works.
Euro companies could have debt in dollars or euros, so if euros dominate their debt - currency risk.
Do you a breakdown in their type of debt?
Little late...but better than never.
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