The pick of the global energy funds
Oil and gas companies don’t make money from high prices, as governments will always intervene to extract the windfall gain through taxation. They make money, like any business, from investing well, operating efficiently and managing their finances conservatively. Still, firm prices reduce the risk of new investment, enabling producers to increase revenues and profits.
The risk is that high prices encourage commodity producers to overinvest, resulting in excess supply, lower prices and poor returns on capital. John Bennett, manager of the Henderson European Focus Trust, raised his exposure to the energy sector significantly in mid-2022 due to favourable valuations, companies becoming more fiscally responsible and the aversion of many investors leading to an attractive outlook being ignored.
“One of the unintended consequences of the ESG (environmental, social and corporate governance) movement is that it enforced capital discipline on an industry that has historically – like mining– been ill disciplined when it comes to capital investment,” he says. “These companies are in long-term runoff, but not as quickly as the market thinks.”
The European energy crisis creates additional opportunities. Higher demand for LNG should favour big companies with the financial resources to invest the huge sums of capital required. There has been a glut of gas in North America, keeping prices down, but additional LNG exports should sustain gas prices and encourage an expansion of output. Equipment and services providers should also benefit.
Some firms have moved heavily into renewable energy, outside their core area of expertise and so, perhaps, misallocating capital. In jurisdictions such as the UK, the popular and political environment is so hostile to conventional energy companies that it adds the additional risks that they will ignore investment opportunities for publicrelations reasons; that they will be subject to global windfall taxes; that they will be unable to attract the skilled staff they need and that their operations will be obstructed by legislation and protestors.
This makes a global energy fund far more attractive than the stalwarts of the FTSE 100, BP and Shell. John Bennett is being proved right, but it’s not too late to buy into the sector. There are several funds to choose from, but the Guinness Global Energy Fund, managed by the highly experienced team of Jonathan Waghorn, Will Riley and Tim Guinness, is my pick.