Schroders is holding an underweight position in oil stocks at a time when there are plenty of other ...
Schroders is holding an underweight position in oil stocks at a time when there are plenty of other investors keen to buy into the sector on a stock specific basis.
Richard Buxton, head of pan-European equities at Schroders, was keen on oil stocks three years ago, when most UK institutions were underweight the sector.
In the 1990s, the oil price traded between $13 and $18 a barrel and Buxton says people anticipated this would continue.
However, a regime shift in Saudi Arabia in the 1990s and improved discipline on production levels among Opec nations has led to success in targeting and maintaining a higher oil price, he says. Against this backdrop, oil company earnings have proven robust despite the difficulties elsewhere over the past three years.
Buxton says: 'During the course of the past three years, most UK institutions have moved to an overweight position in oils. This is the flipside of what I am trying to do in the UK Alpha Plus fund, which is identify and buy stocks that are bumping along the bottom of their price cycle.'
To supplement his lack of oil exposure, Buxton currently has 9% of the fund invested in industrials, one of the its longer-running themes.
Katie Thomson, global oil analyst at Gartmore, says the oil price has dropped off some $8-$9 in recent weeks amid nervousness over a possible further collapse in prices and will continue to trend downwards in the medium term.
While the current oil price looks well supported, Opec needs to reduce its overproduction of oil to prevent prices falling in the second and third quarters, she adds. Opec is expected to meet at the end of April and Thomson believes it will announce a cut in oil production, which would help stabilise prices.
The key issue for oil, she argues, is what will happen in the wake of the war on Iraq with regard to the resumption of oil production and how the rest of Opec will react to offset this and keep prices stable.
Over the calendar year to 31 March 2003, the FTSE All-Share Oil and Gas index generated a total return of -5.79%, outperforming the FTSE All-Share index, which returned -7.02%.
Over 12 months to 31 March, the two indices were almost identical in their returns, with Oil and Gas falling 29.98% and the All-Share declining 29.49%, on a total return basis.
The top-performing stock in the oil and gas index from the start of the year to 14 April is Hunting Plc, with growth of 17.75%, outperforming its nearest rival, Abbott Group, significantly. It has returned 4.48%.
Over the same period, BP fell 2.93% and Shell was down 4.28%. However, Lloyd Whitworth, senior UK large-cap manager at JP Morgan Fleming, is confident Shell will hit its return targets. Meanwhile, BP is still clawing back from disappointments last year when it had to reduce production targets seven times, he says.
Whitworth believes oil can make progress in the UK if other sectors disappoint in earnings terms. The phenomenal cash generation of these companies is feeding through into dividend payments, he notes, resulting in yields of more than 4%. On top of this, they have the ability to carry out share buybacks, he adds.
Value of oil appears reasonable.
Production cut would help stabilise prices.
Oil companies offer yields of more than 4%.
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