With the oil price at its highest year-to-date at market close on 30 April (Brent crude $67 per barrel) alongside the S&P Europe GSCI Energy index growing 15.5% in the space of a month, it appears that the commodities sector is starting to regain the ground lost since the plummet began 11 months ago.
While no one is kidding themselves about the possibility of prices reaching the $100 a barrel mark anytime soon, the sector is once again drawing investor attention.
Matthew Tillet, manager of the AllianzGI UK Unconstrained Fund, said: “You can find opportunities in the energy sector, because it is messy and a lot of people do not want to look at it.
“There is a negative news flow around that area, and, while that does not necessarily mean it is a buy, it might mean that some of it is mispriced. I have quite a few holdings in the oil sector and a lot of the companies are mispriced.
“The UK energy sector has been whacked by the oil price and fears around what could happen if there is an energy price freeze [as proposed by Labour]. But if we look at valuations, a lot of this risk is already factored in, and there is upside potential if things do not turn out as badly as expected.”
Tillett’s conviction is backed up by his portfolio, of which 18.9% is weighted to the oil and gas sector as of 31 March.
However, Knut Gezelius, lead manager of Skagen’s Global fund range, warned that increasing popularity is not always beneficial when it comes to finding an investment snip.
“Energy is being talked about a lot at the moment,” he said. “Values have come down a lot, but there is also a lot of interest and buyers in that sector. While it might look out of favour to some, it is actually almost in favour.”
“Private equity funds have raised new capital to deploy in the energy sector, there has been the Shell takeover of BG Group, people are on a merger and acquisition hunt, and energy conferences are very well-attended. But when a lot of people are looking at buying opportunities, perhaps the so-called bargains are not as good as they might be.”
Gezelius holds an underweight to the energy sector, which represents 3.2% of his Global I fund against a 7.5% benchmark.
But while the contrarian is not overly enthusiastic on the industry as a whole, he is open to gaining exposure if the fundamentals are right.
“In Q1 we picked up Lundin Petroleum, which owns oil fields in the North Sea, in order to get more exposure to the sector,” he explained. “We see the net asset value per share as somewhere between £15 and £17 per share, but stock was trading at around £10 when we bought it, so there was nice discount.
“On top of that, we got the electromagnetic propagation team [used to locate heavy oil reservoirs in pay zones less than ten-metres deep] as a free option and did not have to assign any value to that part of the business, so that was a way to play the low oil price.”
