Following a ferocious rally in American energy stocks, European oil companies are luring US investors who see them as undervalued relative to ExxonMobil and Chevron, for example.
Investors who do not typically invest in Europe are being drawn in by the difference in value between European and US supermajors. For instance, BlackRock's $19 billion US equities dividend fund recently made London-listed BP its second-largest stake.
The development coincides with several European fund managers avoiding oil businesses for ethical reasons.
According to Tony DeSpirito, who oversees the equity dividend fund at BlackRock and is the chief investment officer for US basic equities, "Investors in the US are more amenable to energy investments than [fund managers] in Europe."
When compared as a multiple of their anticipated profits for the upcoming 12 months, shares of European supermajors are trading at less than half the value of their US counterparts. JPMorgan Chase analysts claim that the spread has reached "extreme" levels.
As high oil and natural gas prices fuel hefty profits, the share prices of the majority of international energy producers have increased this year. Performance, however, has changed between the locales. The S&P 500 energy sub-index is up 53% in 2022, more than double the European Stoxx 600 energy sub-growth index's of 18%.
Despite the recent decline in oil prices, which saw Brent crude hit its lowest levels of the year below $80 per barrel, energy equities have continued to prosper. According to analysts, a portion of the resilience can be attributed to unexpectedly strong natural gas prices as well as oil prices for longer time periods that have declined less than spot prices.
The recovery of US energy businesses follows years of underperformance that reached a low point when oil prices crashed at the beginning of the coronavirus outbreak. ExxonMobil was removed from the Dow Jones Industrial Average in 2020 after reporting its first yearly loss in more than a century. However, it generated record profits in the third quarter of this year of around $20 billion, pushing its market capitalization past $400 billion.
A weaker economy, political risks like windfall taxes, and threats like a court decision that compelled Shell to change its strategy last year have all made it difficult for businesses to operate in Europe. The increased focus that European producers are placing on diversifying away from oil and gas by establishing new clean energy enterprises has also drawn criticism from certain investors.
"Investors are saying, ‘You’re good at producing oil, not building wind farms’. Investors are very clear about what Exxon and Chevron do. It’s not so clear to them any more what BP and Shell want to do," said Andrew Gillick, an energy industry expert at the consultancy Enverus.
In addition, given the industry's focus on producing climate-changing fossil fuels, some European asset managers have excluded oil businesses based on environmental, social, and governance standards.
According to Fred Fromm, a portfolio manager at Franklin Templeton, "the shareholder base is less friendly to oil and gas companies in Europe." Although the US-based fund organization takes environmental considerations into account, "it’s about owning the best companies in an industry, versus thinking about ‘sustainability’ as own or don’t own an entire sector, which is a lot more prevalent in Europe."
According to Fromm, he has been extending his relative exposure to European energy stocks.
"There’s always been a valuation gap for various reasons, but it is not normally this big. Historically it has paid off to make that swap into the less expensive names," he claimed.
Supermajor European oil producers continue to be enormous. BlackRock's DeSpirito stated that "the business mix is... certainly not enough to justify the difference in valuations."
By fLEXI tEAM