RWC’s Innes backs BP and Shell bounce

RWC’s Innes backs BP and Shell bounce

RWC’s John Innes has made a contrarian move to top up positions in BP and Shell at a time when the oil price has plummeted to levels not seen in more than a decade.

Mr Innes, a founding partner of RWC and manager of its long-only UK Focus fund, said he was continuing to employ a strategy that sees him buy “out of favour and fashion” equities.

This meant adding to BP and Shell in recent months even as their share prices slumped.

The price of a barrel of Brent crude oil fell below $28 last week, a 12-year low, and oil’s continued plunge has hurt BP and Shell, which have fallen by 17 and 35 per cent respectively over the past 12 months.

But Shell remains Mr Innes’s biggest holding at 5.7 per cent of his fund; BP is also a sizeable position at 3.5 per cent.

“We bought banks in 2008 and industrials during the recession, so now we’re buying oil companies,” Mr Innes said.

He added: “Shell has a lot of downstream earnings that can cushion the blow. It is cutting investment and squeezing suppliers so if the oil price did stabilise, you would have costs continuing to go down as revenues rise.”

Mr Innes said Shell’s planned £35bn takeover of rival BG Group, hotly disputed in some quarters, would improve its cost base, and that it benefited from being financed by Shell shares at reduced debt levels. “That’s a deal that will look good over time,” he added.

Looking ahead, Mr Innes said he would buy only larger, liquid oil firms that can withstand the low oil price.

Suppliers to BP and Shell “looked terrible”. He said the two will have further opportunities to “beat up” these suppliers on price, keeping their own costs down in the process.

Mr Innes said exploration and production companies such as Tullow Oil, whose share price fell more than 65 per cent last year, were basing their sustainability on futures contracts that price oil at $85. On Tullow, he said: “The market will remain rational longer than [it] can remain solvent.”

Despite his BP and Shell positions, Mr Innes acknowledged his fund was still biased towards stocks benefiting from low energy costs.

He favours retailers such as DFS and Dixons Store Group, and said he expected further upside from two of the strongest contributors to his 2015 performance, International Consolidated Airlines (IAG) and cruise operator Carnival.

Mr Innes said consolidation in the airline industry and partnerships and code-sharing among airlines was making the sector more profitable.

A British Airways agreement with American Airlines made its transatlantic route a “gold mine”, the manager added.

On two of the firms that form part of IAG, he said: “British Airways and Iberia’s cost-cutting initiatives have come through as the oil price drops.”

The manager’s UK Focus fund has returned 28 per cent over three years compared to the Investment Association UK All Companies sector average return of 18.2 per cent, according to FE Analytics.