Oil companies are trading at a 48% discount compared to the last decade

The European oil companies have lived two years of infarction. In 2020, the arrival of the pandemic plunged its price, due to the impact of the lockdowns and fears that global demand would take years to recover.

However, they have been two years of ups and downs, since after the collapse of the sector a rapid recovery has come that has meant that the European oil sector, included in the Stoxx 600 Oil & Gas, has already managed to return to trading at the levels at which it did before the appearance of Covid.

For many investors this sounds like bad news. If the oil companies have already recovered from the falls of recent years, the opportunity to take advantage of this bullish rally has already been lost, and the investor has arrived late. However, price is not everything in the stock market, and if other variables are taken into account, such as the valuation of the sector according to the earnings multiplier (the PER ratio), the potential that the Stoxx 600 Oil & Gas.

And it is that, despite the increases in the selective, the improvement in profit forecast for the sector is being so strong that manages to counteract the rise in prices of the main oil companies European. In fact, if the average PER of the last decade is taken into account, and the PER at which the 19 firms that currently make up the sector are listed at this time, according to the profit forecast collected by the consensus of Bloomberg for the next 12 months, you’ll find European oil companies trading at almost a 50% discount to the decade average.

Specifically, 47.7%, one of the most attractive sectors at the moment according to this measure, trading with a PER ratio of 8.1 times, compared to the 16.2 times on average in which it has moved in the last 10 years. In fact, there are only two sectors that are now trading cheaper than their historical average: that of automobiles and that of energy companies, which are listed at a discount of 64% and 60%, respectively.

More earnings per share

If the shares of European oil companies have not stopped rising in recent months, but their profits are increasingly cheaper, there is only one explanation: the earnings forecasts of the experts do not stop growing. In fact, ever since Bloomberg collects data from the Stoxx 600 Oil & Gas, starting in 2005, the forecast EPS for the next 12 months of this selective has never been higher. It has broken records at the start of 2022, exceeding 31 euros per share for the first time in history, since the previous maximum found in this historical series is found in 2005, when it moved around 30 times .

The increase in earnings per share forecasts for the next 12 months has occurred in parallel with a strong revaluation of oil, with the price of a barrel Brent European going from 19.33 dollars in 2020, the day that marked minimums that year, to 93.3 dollars today, a revaluation of more than 382% in less than two years.

If history repeats itself, the European oil companies have a good year ahead of them on the stock market, taking into account that, in 2006, the year that began with an expected EPS similar to that which is handled today, was one of the most bullish in the history of the index, with a revaluation of 31.3% in the year.

Repsol, at 6 times its profit

The Spanish oil company is one of the companies that make up the Stoxx 600 Oil & Gas, and it is a good example of what is happening with the index. Repsol is now listed with a PER ratio of around six times, well below the levels of 2018, when it moved between 9 and 10 times, and those of 2019, when it moved between 8 and 9 times. The attractiveness of its titles according to the profit multiplier is maintained despite an appreciation of almost 15%, in a year that has not been, by any means, as attractive for other sectors of the stock market.

Despite the increases in the oil company, analysts endorse the attractiveness of the firm’s titles at this time, and have once again given it a purchase recommendation at the beginning of February, for the first time in the last 15 months.

And it is that, earnings forecasts for 2022 by the market consensus have already returned to pre-Covid levels, in the environment of 2,800 million euros for the Spanish oil company. It must be remembered that, at the beginning of 2021, the forecasts for this same period fell below 1,700 million, a reflection of the change of opinion that has occurred with the sector.