It’s time for investors to get back into oil
David Stevenson
We may have reached the bottom for prices in hard-hit sector
This month, the Adventurous Investor is turning tactical. Building on ideas discussed in my previous columns, I’ve been busy identifying some specific opportunities emerging out of the chaos of the last few months.
Let’s start with the big turn — oil prices. I’ve been very bearish for the past year and I still think that oil prices could drop below $30 and then $20 a barrel but even I think that the chance of that happening is diminishing by the day.
Why? There’s one key measure — oil storage. If depots and tankers in the developed world had filled up completely over the winter and oil contracts were then sold on the market just to deal with supply, I think we could have seen a final push below $30. I think this possibility is now receding, which means we are probably in a $25 to $45 trading range. That implies we’ve possibly reached a bottom for prices, hence it’s now time for adventurous types to consider start drip feeding money back into the sector.
The established funds in this area are excellent — Guinness Global Energy and Artemis Global Energy — but we’re also beginning to see more opportunistic new funds launch. One of the more notable new entrants on the verge of launching any day now is called Westbeck Energy Opportunities Fund, managed by Will Smith who used to run a stable of resource investment trusts for CQS Capital (namely City Natural Resources and New City Energy).
He’s now teamed up with a well-known energy hedge fund manager Jean Louis Le Mee (formerly of Abydos) and is building an opportunistic portfolio of large and mega caps with a bias towards exploration and production (E&P).
The advantage of this fund is that it’s a clean slate, unlike the Guinness and Artemis funds, meaning it avoids a long tail of past bad investments. The disadvantage for most of our readers is that currently, the minimum investment is $100k and it is based offshore,but I’d expect a proper retail vehicle to emerge within the next six months.
If you can’t wait, I’d personally opt for the Guinness fund although a few direct holdings might also be worth a punt. In my January column, I listed my favourite resources stocks with little or no gearing (my top picks being Royal Dutch Shell, which has risen by about 16 per cent since then, and Wood Group, up by around 7 per cent). I’d add a few additional US names to my list — Antero and Pioneer Natural resources, both of which I suspect will survive the financial carnage that is North American unconventional oil and gas (barely a day goes by without a new bankruptcy). Both also have world class acreages in prime locations including the Appalachians and the Permian basin.
Next up in my opportunistic list is the fast-growing world of alternative finance and more specifically, peer to peer lending. In the past year we’ve seen a slew of funds launched on the London Stock Exchange (for full disclosure, I sit as a non-exec on one called GLI Alternative Finance) tapping more than $1.5bn of investors’ money to provide an income from a diversified pool of consumer and small business loans.
Over the last three or so months there’s been a big sell off and some of the very biggest funds are now trading at a tempting discount. P2P GI currently sells at 9 per cent discount with a running yield of just under 7 per cent while VPC trades at a near 10 per cent discount for a yield of 8.9 per cent. There are differences between the two vehicles but in reality they’re both big, globally diversified, well run and invested in consumer and business loans.
Unless you believe we’re heading into a deep recession — which on balance I think is not probable, though always possible — I think these discounts might be a bit overdone. Interest rates are going to remain low for decades in my view and thus anything offering you between 79 per cent with a well backed balance sheet is worth examining closely. My hunch is that unless the market viciously sells off, the discounts on these investment trusts could narrow to say 5 per cent, which means you might make some capital gains and you’ll still get that plentiful income yield.
My last opportunistic idea is the listed private equity sector, which has slumped in price. Much of the cynicism about private equity is warranted — excessive fees, too much leverage, questionable management skill — but that doesn’t mean that investing in private businesses is a bad idea. Some PE managers add value, and many of the best are listed in London with hefty discounts.
Many wealth managers who own these funds are getting restive and I think we could see some fairly dramatic activist action in the next few months.
According to Numis, the average fund of fund in the listed PE space trades at a 26 per cent discount. Pantheon, the biggest player in the sector, has one class of shares trading at a 32 per cent discount.
These levels are unsustainable over the long term and managers will be forced to realise value. But the malaise is hitting all parts of the sector. Even well-respected outfits such as HG Capital, boasting a fantastic long-term reputation, trades at a 20 per cent discount despite yielding 3.5 per cent a year in dividends. For the investor this could be a great entry point to start drip feeding money into the sector.
David Stevenson is an active private investor writing about his own investments. He may own shares in the companies mentioned.
adventurous@ft.com
