There are a few certainties regarding the current state of affairs in the energy sector. First, even with some recent upside, the sector is still beaten up.
Second, even with oil’s slide and the corresponding downside for energy equities, the sector is far from a bargain on a price-to-earnings basis. Profit estimates have fallen so dramatically that the energy sector’s P/E has been pushed higher, making it the most expensive sector relative to the S&P 500. [Optimism for a big Energy ETF]
There are value opportunities with energy ETFs, including with the oft-overlooked iShares MSCI Global Energy Producers ETF (NYSEArca: FILL). FILL is three years old, has $21.7 million in assets under management and allocates 47% of its weight to non-U.S. energy giants. Said another way, nearly half of FILL’s weight does not reside in the rival Energy Select Sector SPDR (NYSEArca: XLE) and that could be a source of more attractive valuations for FILL.
“We prefer measures such price-to-book value, which reflects many years of retained earnings rather than a single year’s fortune (or misfortune). For example, firms in FILL now trade at a forward price-to-book value multiple of 1.15x, compared with an average of 1.44x since inception in February 2012,” said AltaVista Research in a new research note. “This leads to the opposite conclusion of the P/E analysis above—namely that stocks are cheaper than usual. In any case, with think the real selling point for FILL is that its constituents enjoy increasingly attractive valuations relative to those in XLE, no matter what valuation metric one examines.”
FILL’s international exposure provides another advantage: A higher dividend yield than its U.S.-focused counterparts. The ETF’s trailing 12-month yield of 2.58% is 43 basis points higher than the yield on its family member, the iShares U.S. Energy ETF (NYSEArca: IYE).
In addition to the usual suspects of the U.S. energy patch, such as Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), FILL’s top 10 holdings include European oil behemoths Royal Dutch Shell (NYSE: RDS-A), BP (NYSE: BP) and Total (NYSE: TOT).
“Since inception stocks in FILL have gone from trading at a relative price-to-book value multiple of 0.91x versus stocks in XLE to a relative multiple of just 0.74x. In other words, the discount on stocks in FILL versus their counterparts in XLE has increased from 9% to 26% in the past three years,” said AltaVista. “We believe such a large valuation discount is unwarranted. With an average ROE of 11.5%, stocks in FLL trade at a forward P/BV multiple of just 1.2x, resulting in an ALTAR Score™—our measure of an ETF’s overall investment merit—of 9.2% after fund expenses. In contrast, stocks in XLE enjoy a somewhat higher average ROE of 12.7% but also have a considerably higher P/BV multiple of 1.6x, which after fees results in a lower ALTAR Score™ of 7.8%.”
With return on equity levels depressed, a rebound in oil prices could help FILL outperform U.S.-focused counterparts. That scenario is already materializing as FILL is up 8.3% over the past month, about 70 basis points better than IYE over the same period. [An Energy ETF Looks for Momentum]
Charts Courtesy: AltaVista Research