Energy has been one of 2013’s hot topics for both the trade and national press. Even prime minister David Cameron has urged the UK to embrace the potential fracking for shale gas in the north and south of England.
Fracking – short for hydraulic fracturing – is a method of extracting oil and gas from deep in the ground. It involves drilling a well, then pumping water, sand and mild chemicals down at high pressure. The rock fractures which helps extract the oil and gas within it.
It is quickly becoming one of the biggest environmental concerns of the past few decades and, having already been an issue in the US, is now making headlines in the UK.
The energy sector has had a troubled few years, particularly with the disruption from the Arab Spring in early 2011, which led to a rise in oil prices. In April that year an earthquake hit Japan, which led to a subsequent tsunami and nuclear disaster at the Fukushima power plant and resulted in all of Japan’s nuclear power stations closing. Since, many governments around the world – such as Germany and Switzerland – have announced plans to shut their nuclear power plants.
So far 2013 looks like a different story. As shown in Chart 1, the MSCI Energy index grew 12.96 per cent in the first seven months of this year – the MSCI Materials sector fell 4.25 per cent over the same period – and interest in the sector is increasing. As a comparison, the MSCI Consumer Discretionary index grew 29.94 per cent and MSCI Financials was up 20.34 per cent. But what should you know when looking at increasing your exposure to the energy story?
Where to start?
As with any asset class, different managers take different approaches to investment. Will Riley, co-manager of Guinness Global Energy fund, firstly looks at commodity prices. “We are quite constructive on oil at the moment,” he says. Fair value for Brent crude oil for him at the moment is between $100 and $110. It is currently just within those constraints at $109.
“There are varying views in the market but if you look at valuations on energy equities generally, we think they reflect an oil price of more like $80 in their valuations. The energy equity market is being overly pessimistic about the future for the oil price,” he says.
Another key commodity within his portfolio is US natural gas. The price currently lies at roughly $3.30 but Mr Riley says he thinks in the longer term, it should be nearer $6 to $9. “Whereas oil recovered after the financial crisis of 2008-09, natural gas was very beaten down,” he adds.
