Friday, Apr 20, 2012
Dubai Brent crude highs in the first three months of the year brought back memories of mid-2008 when analysts were predicting $200 (Dh735.6) a barrel. However the price in recent days has eased more than five per cent after edging past $125 a barrel in March, it’s highest in 11 months. Despite some volatility, the oil price is still up 10 per cent this year. And, with expectations that the price will continue to strengthen over the long term, investors are still prospecting for chances to strike it rich.
Mark Mobius, executive chairman of Templeton Emerging Markets Group, is looking for opportunities in diversified oil companies, which can weather the volatile commodity cycles that take place from time to time.
“In our view, a diversified company with operations in exploration, development, refining and retailing has more potential to weather these cycles,” he says. “We see exciting opportunities in countries that are net exporters of commodities and rich in natural resources, such as Russia and Brazil.”
Raj Tanna, equity strategist for Europe, Middle East and Africa at JP Morgan Private Bank, agrees.
“We continue to believe oil equities are very attractive and represent a good investment over both the medium and long term. With crude prices well supported longer term due to declining production combined with low levels of spare capacity globally, the outlook for earnings and free cash flow generation is very positive.
“Alongside this, the oil majors have run very conservative balance sheets, supporting the already high dividend yields but also leading to the prospect of seeing enhanced returns of capital to shareholders.” He warns of the sector’s key risk: that of capital expenditure, which means that with the scarcity of oil globally, companies are forced to innovate more to secure new discoveries.
Timing
But given that oil stocks traded lower even when oil prices were high last year makes it tricky in terms of the timing of going into the energy sector.
“With this in mind, our preferred method in accessing the energy story is often through the indirect route,” says Nick price, portfolio manager of the Fidelity Funds Emerging Market fund and the Fidelity Funds EMEA fund. For example, his team believes the best way to participate in high oil prices is through the banking sector in Russia. Sberbank is their favourite financial due to its ability to generate consistently high levels of rate of return given the country’s low overall credit penetration as its looks after 50 per cent of the country’s deposit base. “As the economy grows due to high oil prices, so too does the deposit base, which allows Sberbank to extend credit to the masses and enjoy high net interest margins,” he says.
Price also finds a lot of value in some of the oil exploration companies such as Ophir Energy. Ophir is active in a number of African countries, including Tanzania, with assets that sit right next to those of Cove Energy. “Cove Energy has more recently been subject to a bidding war by Royal Dutch Shell and PTT of Thailand, which has meant that Ophir’s share price has been rising in sympathy,” says Price.
By Gaurav Ghose?Financial Features Editor
Gulf News 2012. All rights reserved.
