European fund managers are positioning themselves to profit from gains in the oil sector, as prices ...
European fund managers are positioning themselves to profit from gains in the oil sector, as prices look set to remain high for longer than expected.
Oil stocks, which account for 7% of the FTSE Europe ex-UK Index, have bounced since the recent technology correction and are being seen by the market as a safe haven where earnings growth can be found.
As well as benefiting from rotation out of tech, media and telecoms, oil stocks have received boosts from high oil prices, which are volatile but trading for $25-30 a barrel. Robust, synchronised global growth is also boosting the stock prices.
According to Jeff Currington, investment director at Norwich Union, since the start of the year the continents two premier oil stocks, Royal Dutch Shell and Total Elf Fina have returned growth relative to the FTSE Europe ex-UK index of 15% and 9.6% respectively.
Currington believes the high oil prices will not last, particularly as there are signs of a slow-down in the US economy. He says: "The price broke through the $30 mark last week, and the market is looking at the oil price and is doubting whether that is going to be sustainable at these levels because in the past we have seen Opec come in and bring prices down.
"The market has begun to realise that the oil price is going to remain higher for longer than expected and so estimates for profits are being revised upwards against a favourable background of other sectors not doing as well."
At the same time, some oil companies have been embarking on cost-cutting and restructuring programmes which make them even more attractive, particularly in a climate of falling oil prices. Currington, is overweight the sector, particularly in Total Elf Fina and Royal Dutch Shell. He says: "Because oil prices will remain higher for longer there is room for the sector to do reasonably well over the next year."
Oil companies have also exercised restraint in increasing production, in order to ensure that there is not a excess of demand in the medium term.
Fiona Stokes of Britannic Asset Management is also overweighting the sector. She says that up to the end of May the sector has produced absolute returns of 10% over one month, 24% over three months and 14% for the year to date and there is still value to be had.
Stokes says the market expects Opec to up production by between 500,000 and one million barrels a day. This will result in a downward movement in oil prices by the end of the year. Even though this will not result in any earnings downgrades, Stokes predicts that there is the potential for stocks to take a short-term hit from negative market sentiment. However, she believes that the share prices still have some way to go to reach their true value.
Stokes also favours Royal Dutch Shell and Total Elf Fina. She says they both have good management, control over costs, a wide portfolio of assets and efficient use of cashflow such as in planned share buy-backs.
Jeremy Andrews, oils sector analyst at Greig Middleton, believes there will be a decline in oil prices this year and oil companies need to be positioned to reflect this.
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