Even after a sturdy rally that has made the sector one of this year’s top performers, global energy stocks remain attractively valued compared to a basket of global equities.
On a book value basis, or a company’s value after stripping out its liabilities, the MSCI World Energy Index recently closed at a 15% discount to the MSCI World Index of developed markets. The gap compared with an average premium of 2.3 percent since 2000, reports David Wilson for Bloomberg.
The United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) have tumbled 8.9% and 6.2%, respectively, over the past month and the ETFs currently reside an average of about 5% below their 200-day moving averages. [Fundamentals Weigh on Oil ETFs]
Recent declines in oil futures are seen by some market observers as bolstering the valuation case for energy stocks and equity-based exchange traded funds tracking the sector.
The $1.08 billion iShares Global Energy ETF (IXC) sports a price-to-book ratio of 2.3, according to iShares data. That compares with a price-to-book ratio of almost 3.7 on the iShares MSCI ACWI ETF (ACWI) .
Dow components Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies, have price-to-book ratios of 2.36 and 1.57. Highlighting the discounts available with foreign energy stocks, the highest price-to-book ratio among Royal Dutch Shell (RDS-A), BP (BP) and Total (TOT), Europe’s three largest integrated oil companies, is Shell at less than 1.5. Those three European oil giants combine for just over 10% of IXC, less than half the combined weight the ETF allocates to Exxon and Chevron. [Don't Ignore International Energy ETFs]
“Despite outperforming year-to-date, energy sector valuations still have room to grow, as measured by looking at the S&P Global 1200 Energy index. Multiples are still at a discount to their 10-year average and fund positioning is low,” said BlackRock Chief Investment Strategist Russ Koesterich in a note out Monday. “In addition, I continue to see good free cash flow and several recent investment projects are beginning to bear fruit.”
The SPDR S&P International Energy Sector ETF (IPW) is an even less expensive option to consider, indicating the exclusion of U.S. stocks can bear valuation fruit for astute investors.
IPW has a price-to-book ratio of just 1.53 and a trailing 12-month yield that is 44 basis points above IXC’s, according to State Street data. Shell, Total and BP combine for 37.4% of IPW’s weight.
iShares Global Energy ETF
- Oil, Gas, & Consumable Fuels