As the oil price rises the sector has more scope to fund capital expenditure, giving a valuable prof...
As the oil price rises the sector has more scope to fund capital expenditure, giving a valuable profits boost to suppliers and the large oil stocks.
Within their US portfolios Britannia, Newton and Edinburgh Fund Managers are all slightly overweight energy stocks against the S&P 500 benchmark exposure of 5.8%.
Douglas Wright, US fund manager at Britannia, says so-called upstream spending, by exploration and drilling companies, will increase following a fall in the oil price as low as $10-$11 a barrel earlier this year. It is now up as far as $27 a barrel. The knock-on effect of this at the start of 1999 was a capital exp-enditure cut of around 25% to 30% among major oil companies.
In particular, Wright favours the oil service stocks. He says: "We are seeing a number of oil companies coming out and saying they are going to increase capital expenditure, even if it is only by about 10% to 20%, it is still a lot better than last year.
"Oil service companies are going to be the major beneficiaries of this. We like Schlumberger in this sector. It is the largest oil service company in the world and is the most technologically advanced. In addition it is talking of restructuring by selling off its lower returning metering business which continues to struggle."
Wright says he continues to be impressed by the high level of compliance with the Opec agreement to restrict supply, which now looks as if it will carry on until the end of March. He believes there are also indications supply restrictions will be extended further.
He says oil stocks aren't reflecting the rally in oil prices over the past few weeks. Stocks are currently discounting a price of $20 to $21 per barrel but are not reflecting the recent heights of around $27.
Wright also likes Exxon, which, once the merger with Mobil is complete, will be the largest oil company in the world. He adds: "Exxon is the most shareholder friendly of the companies and consistently achieves the highest level of shareholder return compared to expenditure."
Trish Bridson, US fund manager at Newton, says it is unlikely that oil prices will be sustained at current levels in the mid-$20 range and most oil companies are factoring in a price drop to around $15-$18 barrel.
She says: "Although there has been a steep rise in the oil prices, which has been partly discounted by the market, the increase in capital expenditure is yet to be seen. When this happens, there is potential for these companies to make a lot more money.
"Nevertheless, we are very positive about oil, in light of the strong global economic outlook. Demand will continue and we expect capital expenditure to start happening soon."
The Newton North American fund is overweight in big oil companies like Exxon and Texaco.
Andrew McMenigall, fund manager at Edinburgh Fund Managers is most positive on energy service companies on the back of expectations of increased expenditure in drilling and exploration.
McMenigall says: "For that reason we own Haliburton as our main oil service company stock. There are other similar service companies in these category, and the rising tide will lift all boats, but we consider this company has more of an upside."
He says the higher oil price is positive for the bigger integrated companies but among these he is more positive on those focused on the upstream exploration and production, because they are leveraged to the higher oil price, rather than downstream activities of refinement and marketing.
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