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Global Malaise Not Effecting These Countries (Or Companies)

Published 03/07/2013, 12:02 AM
Updated 07/09/2023, 06:31 AM

Yes, there has been a global malaise that began in 2008. (Much earlier, actually, but 2008 is when someone noticed that the drinks were being paid for with Monopoly money.) The US Federal Reserve had been spiking the punch bowl and refreshing it every time the drunks
started to sober up. When the nation responsible for more world trade and consumption than any other gets a really bad hangover, it’s tough for the rest of the crowd not to be affected.

Yet some were more responsible during this time than others. No Norwegian, Swedish or Finnish banks were deemed 'too-big-to-fail' and lavished with massive tax-payer bailouts. Canadian banks are still among the safest in the world and behaved during all this like...well, like “bankers” used to behave in the USA. Australia, New Zealand, Hong Kong, Israel, The Netherlands, Singapore, and others are certainly affected by the hangover here, but they were not felled by it.

Others, once felled, seem to be rising, like the UK. It’s the old ham and eggs analogy highlighting the difference between being involved and
being committed: the chicken is “involved” in your break-
fast; the pig is committed. Some nations are merely “involved” with the US errors in judgment. As a result, we are more confident about corporate governance, accountability, and responsible regulation in these countries.
That’s why so many of the great holdings we're consistently interested in are domiciled in nations like these.

Of course, no matter how fine the company and what we project as its future earnings and dividend stream, or how responsible the nation which reviews its operations for compliance with the highest standards, we still insist upon buying when the geographic region, the sector in which the company operates, or the company itself is fairly priced. Here are some firms that discipline leads us to right now: Norway’s Statoil (STO), which may be purchased today for 13% less than it sold for one year ago,
fits this bill. So do Canada’s Imperial Oil (IMO) and Cenovus Energy (CVE), down 12% and 17% in the same period, The Netherlands’ Royal Dutch Shell (RDS.A and RDS.B), down 7%, and Israel’s Teva (TEVA) down 16%.

Jardine Matheson (JMHLY), nominally headquartered in Bermuda but in fact a Hong-Kong/Southeast Asia/China proxy, is up during this period but represents exceptional value — in my opinion, even more than it did a year ago — as does Singapore’s Keppel Corp (KPELY.) The UK’s
BP (BP) is down 16% and a bet with my friend Jim Rickards, a month after their Gulf spill disaster, has already earned me a free dinner; now I’m on to bigger profits. And AstraZeneca (AZN), also UK-based, is flat on the year and its future earnings stream looks bright.

You’ll notice that we haven’t held but a smidgen of oil and gas stocks this past couple years. That’s because we didn’t see a bright future for them. You’ll notice that 5 of the 8 we currently like best are in the oil patch.
Buying at the right price counts. STO operates in 46 countries, including the USA and Canada, but it earned its spurs on the wild Norwegian continental shelf, one of the stormiest, coldest and most dangerous marine environments on earth. Statoil takes the rigors and challenges of their operating environment seriously. They know that their countrymen live in one of the most beautiful places on earth and a disaster there would be a true catastrophe. STO’s 30,000 employees hew to rigorous standards for health, safety and the environment (HSE).

I think their experience in harsh environments and their commitment to safe exploration and production is going to win them huge new business in the future. “Who ya gonna call” if you are seeking a partner with a flawless safety record and experience in the most extreme marine environments like, say, the Arctic? I’m guessing Statoil is on everyone major’s short list to seek out as a joint venture partner. This time last year the stock was 28.50; the lowest it got in the June swoon was
22.15. At 24.80 the stock sells for 6 1/2 times earnings and yields 3.7%.

Royal Dutch Shell (RDS.A) is a well-managed company with an attractive long-term growth strategy that is currently out of favor as a result of their abandonment, for this season, of drilling in the difficult waters off-shore Alaska. The question I ask is not, “Did they succeed on their first try?” but “Do they have the deep pockets to succeed on the next one? Do they have the right technology in place? Are they using the combined intellect and experience of other partners?” In all cases, I answer, “Most likely, yes.”

They have a beautiful balance sheet and good, steady
earnings advances. Slow and steady but, then, slow and
steady wins the race. The only problem I saw in their most recent earnings release was that they are not replacing their reserves as quickly as they are selling their current production. But then I never expect an oil company to do so every quarter; that’s Wall Street thinking.

As long as they do so over time, I still believe they are well worth owning. Others disparage Shell for focusing on Alaska’s Arctic waters when cheaper oil is available elsewhere. I say it only takes one elephant find to make the skeptics suddenly tout Shell as if it were their favorite all along. RDS.A is a savvy company that generated cash flow from operations of $46 billion in 2012, an increase of $10 billion from 2011. Shell has 30 new projects under construction, which it says should result in 7 billion bar-
rels of resources. They don’t expect all of them to work out. Neither do I. But enough will do so to keep Shell very much alive in the “super-major” category. It may even help them improve their gross margins, which cur-
rently trail the industry over the past 5 years, 17.5% to 27%. You are paid to be patient with a company selling at 7.8 times earnings and yielding 4.7%.

Teva Pharmaceutical Industries Limited (TEVA) is a pharmaceutical titan which manufactures and sells both branded medications as well as generic drugs. With aging populations in the developed world (and not-so-developed; look at China and Russia) the future is good for the US and non-US pharmaceutical industry and particularly good for those firms scrappy enough to compete in the generic drug marketplace.

Many drugs are coming off patent in the next couple of years and I think no firm is better prepared to profit from this than Teva. That’s not to say the company’s earnings stream is assured; execution counts. Given that Teva sells 80% of its generics through wholesalers or big drugstore chains, there is a constant struggle to maintain margins as these mid- and
end-sellers flex their muscle.

Also, Teva’s branded drug business is itself subject to patent expiration. But neither of these are new issues; Teva has successfully navigated
between Scylla and Charybdis for years. I believe they will continue to do so. One of the reasons the stock is down is because they have taken on more long-term debt to make serious acquisitions of big competitors. However, they still carry an A- credit rating and, as such, were able to borrow very cheaply. Their timing may have been propitious. I see much economy of scale resulting from their most recent purchases, I like the new management team a lot, and I believe their earnings will grow as will the dividend. At 16 times earnings with a 2.8% yield (and a pay-out ratio of just 32%) I see TEVA as a great company to own on any pullback.

There are also some well-managed American companies that offer good value at today’s prices. National Oilwell Varco (NOV) is down and Schlumberger (SLB) is flat after a full year of good markets. (Yes, I know
SLB was headquartered in the Netherlands Antilles and was incorporated in France but its real operations are now HQ’d in Houston, so it’s as American as any other multinational with operations in 100 countries. Its CEO is Norwegian and its other senior execs are from around the world, but “Texan” is the common language spoken at the corporate offices.)

Both of the above selections are from within the oil and gas sector, as well. I seek out-of-favor sectors that look to me to have an assured earnings stream with good growth in top-line and bottom-line revenue and a history of increasing their payout to shareholders. Right now, oil, gas and energy services firms fill all those requirements. NOV and SLB are, in my mind, the two crème de la crème oil and gas service companies on the planet. We are fortunate they are both in America; let’s hope the current
Administration’s hatred of fossil fuels doesn’t drive companies like this somewhere else.

Schlumberger (SLB) is the industry leader in developing innovative productivity solutions for the oil and natural gas industry. There is no question in my mind that the biggest growth in the world of drilling for oil and gas will be offshore – offshore and deep. Nobody has more experience, data, products or experienced personnel than SLB when it comes to deep offshore drilling. I think SLB is in a win-win situation. If global production of oil and gas increase, SLB will be called upon to assist on the exploration and discovery side of the business. If oil and gas production decline, SLB is likely to benefit from declining production by offering services, equipment and expertise to maximize the yields from pre-existing oil fields. Either way, SLB grows its revenues and earnings.

For 40 years in this business I’ve been hearing that this is the year we are at “Peak Oil.” Those who do not understand that this term came about to describe a particular well or region continue to bandy it about as if it were some immutable gospel. And yet, every year, we either discover more oil and gas in places we hadn’t been able to look before or we discover new ways of secondary and tertiary recovery from wells and regions we previously thought were played out.

Both dynamics play to Schlumberger’s strengths. The final reason I like SLB versus its competitors is its international span. North America accounts for just a third of SLB’s revenue, whereas for Halliburton and
Baker Hughes it is more than half. The company bought back a half billion dollars of its shares over the past year at an average price of $66.30. Smart. We’ll be happy buying anywhere below $70 for what I imagine will be close to a triple over the next 5 years. Slow and steady.

National Oilwell Varco (NOV) is a direct competitor of SLB. While not as well-known as Halliburton (HAL) and Baker Hughes (BHI) – outside the oil patch, anyway – a series of brilliant acquisitions has leapfrogged NOV to the #2 spot, just behind SLB. Over the past year and a half NOV acquired Wilson International ($800 million), CE Franklin ($239 million), and, most recently, Robbins & Myers for $2.5 billion. As a result, NOV is second only to Schlumberger in market cap. Its PE is lower than any of the big 4.
It has the most desirable PEG ratio and is second only to SLB in its profit margins and cash on hand. Its total debt is the lowest of the big 4 and its current ratio the strongest of them all.

My problem in trying to buy National Oilwell Varco is that I’m competing with some pretty savvy players who are quietly accumulating it at these prices. Warren Buffett just added to his hoard, taking him to a little over 5
million shares. I like the fundamentals, I like the valuation, and I like the company we’re keeping when buying the stock. I also like that 94% of NOV’s rig backlog is destined for international markets where the opportunities for big discoveries are great and the shale boom is just beginning to be realized. At less than 12 times earnings, it’s a buy today.

Some Quick Notes:

Both Penn Virginia (PVR) and Natural Resource Partners (NRP) have suffered devastating pullbacks in the last few weeks and months. After all, they’re in the dirty old coal business and nobody’s using coal, right? Wrong, wrong and wrong.

First of all, there’s thermal coal (for heating and electricity generation) and there’s metallurgical coal (for making steel.) Guess which the land they lease contains. Second, they are not coal companies but energy
companies, owning nat-gas pipelines, fracking sand operations, and much more. Third, while we may be enjoying a respite from coal usage thanks to fracking in the US, the rest of the world still depends on coal. We will start re-accumulating on pullbacks.

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