Aberforth’s smaller companies managers are eyeing up opportunities in oil and gas stocks that have entered their investable universe following sharp sell-offs.
Medium-sized oil and gas companies have been hit hard by the decline in the oil price through the second half of 2014 and into 2015.
The resulting share price falls have seen many stocks drop into the Numis Smaller Companies ex Investment Trusts index, where they have piqued the interest of value investors on the Aberforth Smaller Companies investment trust.
In its latest report, the Aberforth team said at the end of 2013 it had started adding to oil and gas companies “in a meaningful way for the first time in around a decade”.
The managers had bought into the sector due to the low valuations on many of the companies and the fact that there were signs that merger and acquisition activity was picking up.
The Aberforth team suggested larger companies were coming around to the idea that it might be cheaper to buy smaller rivals with good oilfields rather than searching for sites themselves.
But the oil price fall seems to have put such merger plans on hold, and also led to sharp share price falls across the sector, which has sent even more oil and gas companies into Aberforth’s investable universe.
The managers said their exposure on the Aberforth Smaller Companies trust to the sector was 3.7 per cent at the start of January this year but their benchmark index’s exposure had risen to 5.8 per cent, as new companies had dropped into it from larger capitalisation indices.
The Aberforth team said it would “look to take advantage of an indiscriminate sell-off in share prices that [have] become unfairly reflected in the valuations of small oil companies”.
The trust’s current oil and gas positions include SOCO International, Petroceltic International and EnQuest.
SOCO International, which has its main oil interests in Vietnam and a number of sub-Saharan African countries, has suffered a 35 per cent fall in its share price since the start of September, although it has rallied slightly since hitting a low in mid-December.
North Sea exploration and production company EnQuest has been hit even harder, losing nearly three-quarters of its value since the middle of 2014.
By contrast Petroceltic International, with operations in North Africa, the Mediterranean and the Black Sea, has fared better after receiving a bid from Dragon Oil in October. The bid has since been abandoned, but Petroceltic’s share price is still only roughly 20 per cent down from its pre-bid share price.
However, the long-term value investment approach on the trust has meant its managers are still eyeing up more opportunities in the sector, which could rebound significantly if, and when, the oil price rises.
In spite of this, the Aberforth team also has positions in companies that should benefit from the decline in the oil price, such as plastic packaging firm RPC Group, which the managers added to in January, bringing the stock into its top-10 holdings at the end of the month.
