The economic weakness in Europe has caused many energy producers there to trade at a discount to US counterparts, says Elliott Gue, who shares two specific names.
Elliott, it’s great to have you with us, especially as you are one of our best energy experts in the country. You have written several books on the subject, and have steered us into so many great investments.
We’ve already talked about some great areas that we’ve now posted on MoneyShow.com about MLPs and domestic exploration pipelines and so forth. Give us some areas outside the US where you seem to feel there’s going to be quite a bit of activity.
I actually think the international markets are a good place to be in the first half of 2013. And in particular, Europe is going to be an interesting market, mainly because it’s finally starting to heal a little bit.
We’ve had a financial crisis there underway over the last couple of years...but the yields on Italian government bonds are way down from their highs. In late 2011 they were over 7.5%; now they’re down in the 4% range. That’s a dramatic improvement in their borrowing costs.
I think the European economy generally may actually exit recession in the second half of 2013. Stocks tend to do well right before and after a recession, so I think there’s actually a lot of opportunities in Europe to find companies in the energy space that are trading at a discount to similar companies in the United States.
One classic example of that is the Italian integrated oil company, Eni (E). It yields about 5.5%, so it does pay a nice dividend, and that’s just a standard dividend. The reason is, it’s the cheapest of the large integrated oil companies, so if you look at that space you’ve got companies like Exxon (XOM), like Chevron (CVX), like Total (TOT) and BP (BP). Exxon’s of course the most expensive. Eni is the cheapest of all.
They also offer the highest yield in the sector at 5.5%, and I think that yield is actually going to go up this year. They’re going to continue to increase it, but they’re very similar to the other integrated oil companies.
I think they’re trading at a discount. I like to call it the PIIGS discount because they’re trading at in one of the countries, the fiscally troubled countries in Europe—you know, it’s an acronym for Portugal, Italy, Ireland, Greece, and Spain—and they happen to be based in Rome, so they’re trading at a discount even though they have some great production growth prospects out there.
One of the most exciting is off the coast of Africa, where they found the Mamba Complex, which is a gas field.
That belongs to Eni?
They are the leading producer there. They have more acreage off the coast of East Africa than any of the other majors. They think that’s a 30 trillion cubic foot find.
Another area that they excel in is off the coast of Norway, where they partnered with Statoil (STO), which is a Norwegian state-controlled oil company. In one of my books, I wrote a lot about Sovereign wealth funds, and of course Norway has one of the largest of all.
The Rise of the State, was it not?
The Rise of the State. You know they’re actually one of the main producers in the Barents Sea—not the Bering Sea, but the Barents Sea, which is in the Arctic area off the coast of Norway. They made a number of finds up there. There is a very large natural gas find. They’ve also had some oil finds in that area. Eni is not the operator of those, but they are one of the main producers.
They do have also some major finds in the Gulf of Mexico. In fact, they’ve partnered with Exxon Mobil on a major Gulf of Mexico deepwater find. They have 100,000 barrels of oil equivalent production in the Gulf of Mexico deepwater.
So they’re really all over the world, just like a company like Exxon Mobil, but they trade at a fraction of the price, of the valuation of Exxon, and they offer that nice 5.5% yield. So I really think Eni is an outstanding opportunity.
They pay quarterly dividends?
Yeah...they pay a semi-annual dividend.
But it trades in the United States as an ADR, and ADS?
It does, under symbol E.
Is there foreign withholding tax on it?
Yeah...it only has a 20% foreign tax withholding rate for foreigners, but you can actually claim it as a credit against your US tax return.
I would recommend holding Eni in a taxable account, because if you hold it in an IRA, you cannot claim back that withholding tax—so they’ll still withhold it, but Italy is not one of those countries where we have a tax treaty for IRAs. Even though you hold it in an IRA, they’ll withhold that same tax, and unfortunately you’re not able to then claim it back. If you hold it in a taxable account you can claim back that withholding tax as a credit against your US tax liability.
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