One of the side-effects of the unrest in North Africa is the jump we have seen in oil prices. As Libyan production and oil carried through the Suez canal are mainly destined for European markets, the impact has disproportionately affected European prices.
Although we have not yet reached the levels we saw in summer 2008, Brent crude is up by about a third since the trouble started, while West Texas Intermediate is up about 10% – the two benchmarks have been diverging since the new year. Higher oil prices do not necessarily translate into bumper profits for the oil companies but many will benefit.
There aren’t many investment companies that focus on traditional energy production. BlackRock Commodities Income is probably the most liquid way of getting exposure to the area.
Share prices of energy producers have lagged mining companies in recent years but this fund, which invests in both (roughly 50:50 but with a bias at the moment to energy), has still managed to build a commendable track record while churning out a yield well over 3%.
It trades at a small premium to asset value – with a market cap. of around £140m. They raised £20m in September last year and I think there ought to be scope for them to expand the fund again in 2011.
The managers were warning that oil inventories and OPEC spare capacity were trending down before the crisis started. The portfolio is reasonably diversified and exposure to the most adversely affected companies, such as Italy’s ENI, is not that large.
New City Energy is a purer play on the energy sector and has generated much better returns than the BlackRock fund but it is smaller, with assets of around £45m and does not pay a dividend.
It trades on a discount, currently around 9% – probably the result of lower liquidity and the absence of yield. It too deserves it be bigger. Its managers were warning recently that a sudden spike in oil prices could hit demand and so might prove short-lived. The strength of the US recovery may be just as important as the supply problems.
Events in Libya are moving fast; as I write, analysts estimate oil production is about half its usual rate. We cannot ignore the possibility that other significant oil producing countries will also be affected. Worries about security of supply, growing acceptance of the “peak oil” scenario and graphic reminders, like Macondo, of the increasing difficulty of extracting oil are driving investment in alternative energy. This area may be a beneficiary of the current turmoil.
I thought I would make a small investment in the area on the back of this idea. There are a few private equity funds with investments in the sector but those funds that invest in quoted alternative energy companies may be more interesting in the near term. Impax Environmental Markets has just under half its assets in energy plays but, within that, its exposure to renewable energy is just 17% of the portfolio.
This time it is a BlackRock fund that is a purer play – BlackRock New Energy – and this is the one I have opted for. The fund listed in 2000 in the midst of the tech boom. Back then the hype was around fuel cells. A large number of companies went to the wall as the technology failed to deliver.
The fund price collapsed but the managers put greater emphasis on investments in profitable companies and the net asset value gradually recovered. The past few years, since the credit crunch, have been disappointing; consequently it now trades on a 16% discount.