The UK oil sector has performed strongly over the year to 19 August, up 17% relative to the market ...
The UK oil sector has performed strongly over the year to 19 August, up 17% relative to the market and up 12% over six months to the same date.
Richard Buxton, head of UK specialist equities at Schroders and manager of the Alpha Plus Fund, says analyst forecasts on the oil sector are based on lower prices for this year and the next than is actually likely to be the case. As a result, he favours the sector at present.
While he says there is a war premium in the oil price of about $3 a barrel, he believes shares are being priced lower than they ought to be.
Buxton says: 'In a market where there is a general cautious corporate profits outlook, this is a sector that looks underpinned to us.'
Anne McCreaddie, investment manager at Britannic Asset Management, says one factor behind the decent performance of the oil sector has been the fact that Opec compliance has been high, which has kept share prices higher, as it has limited supply to the market.
Charles Luke, UK fund manager at Aberdeen Asset Management, says most analysts forecast the price of oil to be $23-$24, yet the price is currently around $27-$28 a barrel, so there are likely to be upgrades in forecasts.
Luke says that in difficult markets, companies in the oil sector have visibility in their earnings, a lot of excess in their cashflows and do not have overly geared balance sheets. He adds that BP and Shell are also yielding 3%-4% a year.
Buxton says his preferred stocks at present are BP and the reincarnation of British Gas.
He prefers these companies over Shell for their delivery of results and management, but he says, at this juncture, money can still be made from Shell.
Over the year to 31 July, BP has outperformed the FTSE Oil and Gas Index by 22.64%, returning -5.49% compared with the sector return of -17.15%.
Buxton says: 'Oil prices will remain higher than people expect for most of the year. If oil prices do move up, we will review our overweight position but at the moment oil prices are trading at levels below the level of capital employed by the companies.'
McCreaddie says she has been marginally overweight the sector and will continue this stance in the short term.
However, she says the real question is when people are going to become more comfortable moving back into growth companies.
She says: 'There are cyclical elements to the oil sector, it should perform well when growth picks up, but this time, investors might move into other areas to achieve growth when the market finally picks up.'
Luke says that it is actually dangerous to be underweight in the sector as it is a hedge against the current geopolitical risk as oil prices would spike if the US invaded Iraq.
While overweight in the sector, Luke says if the US does invade Iraq, that would be the time to start selling as the spike will happen very rapidly and it is easier to sell into a rising than falling market.
Oil shares priced lower than they ought to be.
Strong earnings visibility in sector.
Good yields in sector.
Less upgrade potential if prices move up.
Other growth stocks more attractive.
Attack on Iraq could destabilise sector.
Bought plans in 1988 and 1989
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