The euro swooned to a four-year low against the U.S. dollar on Monday as European Debt Anxiety, which we'll call EDA, continues to throw doubt on global earnings and economic forecasts -- and that's making for a double-whammy against some blue-chip oil stocks.
Dow components ExxonMobil (XOM) and Chevron (CVX), as well as ConocoPhillips (COP), are getting slammed by a host of factors. The global flight to safety is punishing stocks all over the world, for one. And the oil disaster in the Gulf of Mexico isn't doing the sector any good, ether.
But EDA is a key part of these energy companies' stock-price woes. Draconian budgets cuts among the more debt-burdened European nations could lead to a subpar economic recovery, which would hurt demand for oil. At the same time, euro-fear is lifting the greenback. Recall that oil is priced in dollars, meaning as the dollar rises, the price of black gold falls.
Those macroeconomic forces have caused a barrel of crude to drop nearly 2% this month alone, falling below $70 a barrel at one point Monday. On the other hand, the U.S. Dollar Index, which measures the buck against a trade-weighted basket of six major currencies, has popped more than 6% since the S&P 500 ($INX) notched its 52-week high in late April.
The chart below, which we created using Capital IQ, starts at the April 23 market top. The dollar, as measured by the PowerShares DB U.S. Dollar Index exchange-traded fund (UUP), is the green line. The price of oil, using the U.S. Oil Fund ETF (USO) as a proxy, is the red line. In between are the share prices of Exxon, Chevron and Conoco.
The shares of the integrated oil and gas companies are getting beaten down to some pretty tempting valuations. Any investor wanting to bet that EDA is overblown might want to take a look at these stocks at current levels. They could be cheap plays on a recovery that comes in stronger than the market is forecasting right now.
Attractive Implied Upsides
Exxon, for example, currently trades at less than nine-times forward earnings. That represents nearly a 25% discount to its own five-year average, according to data from Thomson Reuters. Shares are even cheaper on a trailing earnings basis. Analysts' average price target stands at $80 a share. Add in Exxon's 2.8% dividend yield, and you get an implied upside of 30% in the next 12 months or so.
Chevron has a forward price-earnings (P/E) multiple of just 7.4. That offers a 20% discount to the stock's five-year average and an even deeper discount to its trailing P/E. With a target price of more than $90 and a whopping 3.7% dividend yield, the implied upside comes to 18%.
Conoco has held up the best of these blue chips, but the relative valuation is still intriguing. Its shares offer only an 8% discount to their five-year average by forward P/E, but they trade at a 40% discount on a trailing P/E basis. Analysts' average price target stands at $62 a share, according to Thomson Reuters data. Throw in the generous 3.9% dividend yield, and the implied upside comes to a compelling 17% in the next year or so.
If you doubt that the dollar will continue to climb as it has of late, buying these Big Oil stocks now could be an antidote to EDA.