Even with a population slightly smaller than New Hampshire, the small Mediterranean island of Cyprus is throwing a wrench into the global economy. Like several of its European Union neighbors, the country is facing a debt crisis, as its banks have suffered from betting too heavily on investments in Greece.
And now, Cyprus — like Spain, Portugal and Ireland — has been forced to request bailout funds from the EU and International Monetary Fund as a way to shore up its finances.
While the amount of the bailout seems pretty doable considering the nation’s relatively small size, the terms for the deal have sent a shockwave throughout the global economy, pushing a variety of industries downward.
For investors in the energy sector, that reality could actually be fruitful in many ways.
See, at only $13 billion, the Cypriot bailout is really a tiny sum compared to the nearly $150 billion given to Greece. However, it’s the first time the eurozone and IMF have taken a cut of people’s savings. Under the terms of the deal, citizens will see a one-time levy of 6.75% on deposits under 100,000 euros and 9.9% on higher amounts.
Part of the reason for the one-time tax was the fact that Cyprus has gained attention as the No. 1 hot spot for Russian money laundering and tax-evasion for uber-wealthy expatriates in Europe. Think of it as the Cayman Islands for hedge funds here in the U.S.
The worry, though — and thus the reason why people are freaking out — is that if such a tax becomes standard in other rescue packages, investors and depositors will flee, churning up concerns of a contagion effect in European economies battling sovereign debt issues. Some have even postulated that such a tax could be coming to the bank near you!
Given the potential for contagion and problems spreading to the rest of Europe and the global economy in general, the market has once again returned to a “risk-off” trade after several weeks of rising.
And that brings us to the energy sector. The Cyprus crisis has caused energy investors two very specific worries:
- Oil demand. Any contagion or spreading of economic weakness would further cut oil demand for the eurozone and the continent. Already, the region has been showing some new signs of strain as austerity measures and high unemployment have hindered growth. Europe needs every good piece of news it can get its hands on … but the potential of banks-runs, riots and fresh austerity measures certainty doesn’t bode well for oil demand.
- Safe havens. As “risk-off” has once again become the mantra, investors have flocked to strong safe havens. Gold is up, but more importantly for energy investors, the dollar is once again rising. Buying activity in Treasury bonds and greenbacks — at the cost of holding euros — has surged since the news of the potential deal broke. In terms of energy, a stronger dollar means crude-oil futures become pricier for investors using some foreign currencies. Again, higher prices for those buyers means lower demand.
These factors have pushed down futures for Brent crude — the benchmark for European oil pricing. The May ICE North Sea Brent crude oil contract was trading down roughly 1.6% lower to sit at $108.02 a barrel. That’s on course to settle at a three-month low. At the same time, U.S. benchmark WTI crude has sank by about as much percentage-wise on the news after reaching a three-week high this past Friday. The volume of all futures traded was 75% more than the 100-day average.
But fear mongering aside, odds are that this sort of deposit-haircut won’t be coming to a bank near you … or really any other large European nation. And as they say, investors are smart to “Be greedy when everyone is fearful.” Thus, the drop in energy prices — and in the shares of those that produce that energy — could make for some great longer-term buys if these weakness persists.
Europe’s two major producers — Italy’s ENI (NYSE:E) and France’s Total (NYSE:TOT) — are two prime examples, as both shed around 1.5% yesterday in the fact of the deal. Still, both have seen rising production over the last year — something several American super majors have struggled with. That production comes from a variety of global locations including plenty of unconventional drilling here in North America’s shale formations.
Additionally, both TOT and E offer some of the sectors highest dividends at 5.7% and 6.1%, respectively. Add in the fact that both trade at cheaper forward P/E’s than stalwarts like Exxon (NYSE:XOM) and you have an interesting bargain beginning to form. Any continued European softness will mean the two super majors are quickly become big-time buys.
If you want a more specific Cyprus energy play, then Noble Energy (NYSE:NBL) could be it. In late 2011, the independent E&P firm discovered gas reserves of up to 8 trillion cubic feet in the waters near Cyprus. The nation’s natural gas reserves in its territorial waters could hold as much as 60 trillion cubic feet and the country has already granted licenses for exploratory drilling in six blocks.
Noble will begin drilling this year and — while it may be a long time before it sees commercial production — the potential is there. Again, NBL features a vast global footprint. But as the bank-drama in the nation plays out, Noble could quickly find itself in bargain territory as well.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.