Financial Times: Chilly quest for hot opportunities in oil fields (ShellNews.net) 13 Nov 04

By Lucy Warwick-Ching

Published: November 13 2004

Poppy Buxton has done a lot more travelling the average 26-year-old, spending about two months on business trips abroad each year. The destinations include places such as British Columbia and California, but she does not consider her job as glamorous as it might appear.

As co-manager of the Merrill Lynch New Energy Technology Trust, the MLIIF World Energy fund and the MLIIF New Energy fund, she sometimes spends weeks at a time living in basic cabins in remote places in temperatures of minus 30 degrees.

"Between Robin Batchelor, [who also manages the funds] and I, we see around 200 companies a year, so we spend a lot of time visiting assets in far-flung places," says Buxton.

Last month she was in the far north of Canada in Fort McMurray and Calgary, visiting oil companies Suncor, Syncrude, Shell Canada and Western Oil Sands.

"There's no longer oil in glamorous places," she says. "A lot of the basins that were discovered early on are now maturing and are running out of oil. So people are having to look further afield to places that are generally a bit harder to get to."

But that does not mean oil is running out, just that it's becoming more difficult to find. "The reserves in that area of Canada equal the reserves in Saudi Arabia and there are new oil sites being discovered all the time," Buxton explains.

As an example she cites her recent trip to India, spent visiting companies that have made major oil discoveries in the desert. She visited oil exploration company Cairn in Rajasthan, Niko and Cairn in Gujarat and also had meetings with Reliance, ONGC and IOC, all of which are operators in the oil fields.

"I'm the first person from the financial industry to go and see that asset in Rajasthan since they found the oil," says Buxton. "I think it's really important to visit the company before deciding whether to invest so as to get an understanding about what it will take to build that asset."

She believes it's also important to meet the pipeline company. "It's vital to know how you're going to get that oil out; you can't sell the oil without getting it out of the country. So it's important to see how they operate in relation to other companies. It's not just about seeing one company. By visiting the asset we can get information about a whole raft of companies and can get a sense of the geography, the region and the politics."

Buxton joined Merrill Lynch Investment Managers in 2000 after graduating from Imperial College of Science and Technology with a degree in Physics. Before joining the Natural Resources team she was responsible for the basic materials, utilities and energy sectors for the US equity team.

She joined when stock markets had plummeted and people were steering clear of equities, but says it gave her an understanding of how markets work.

The World Energy fund she now manages is doing very well. It has more than tripled in size since the beginning of the year and has returned 27.9 per cent. Since launch it has returned 58 per cent and over two years it has returned 73.5 per cent.

Buxton says she has found new opportunities in the sector even though some of the larger players in the oil and other energy industries have been struggling to replace reserves.

"We prefer companies classed as small to mid cap for the sector," she continues. "These are still large liquid companies, but we feel that in some cases the opportunities that these smaller companies offer are superior to the larger ones. Smaller companies tend to have a strong reserve base and provide production growth at a reasonable cost."

She says high oil prices and expectations of higher ones have also boosted interest in the sector and the fund. "It looks like prices will stay higher for longer and we will see some positive earnings."

On the supply side, she says there is virtually no spare capacity. "Opec have not invested heavily in recent years, so their supply has been relatively constant. But at the same time demand has grown, so the spare capacity that Opec held has been totally eroded," she says. "So what we've got is an incredibly hyped oil situation and little leeway for that to be alleviated in the near term."

However, she says the rising oil and gas prices are helping increase investor enthusiasm in alternative energy sources.

Together with Batchelor, she also manages the ML New Energy Technology fund. It invests in four subsectors: renewable energy, automotive and onsite power generation, energy storage and enabling energy technologies.

"The new energy sector is taking off because there is a shortage of traditional energy sources around the world," she says. "Natural resources such as gas and oil are finite, so the few companies that can come up with things such as fuel cells cheaply and easily have great potential to grow."

The ML New Energy fund has returned 16.3 per cent in the year to the end of October and 56.2 per cent over the past two years.

Buxton cites environmental pressures, economic growth and concerns over energy security and reliability as drivers of the rapid development of energy alternatives for a global market.

One of the big drivers in the new energy sector is countries trying to secure a new energy supply. "The US imports 58 per cent of the oil it needs and is very reliant on Venezuela and Saudi Arabia," she says. "This is currently not the greatest situation for it to be in, so it is very focused on trying to generate new energy."

Buxton also says that government grants for alternative energy sources in the UK have resulted in more opportunities for investors. Electricity providers will be required to produce 10 per cent of their power from renewable sources from 2010.

"Environmental pressure has quickly translated into government regulation and that is providing an investment backdrop for utilities and companies to start generating renewable energy," says Buxton. "That is a major long-term driver and we don't see any reason for it to diminish."