IFAOnline: Oil’s well for now, renewables can wait a while, says managers: “Capable management contrasts with stories of, for example, Shell ‘losing’ billions of barrels of proven reserves…” (ShellNews.net)
By Jonathan Boyd
Posted 21 Sept 04
Smaller exploration and production oil companies are right for the investor now, while alternative energy sources are a punt for the future, a roundtable organised by the AITC has heard.
Derek Mitchell, director UK equities ISIS says so-called E&P (exploration and production) companies such as Cairn Energy are better bets at present in the oil sector than the majors.
Capable management contrasts with stories of, for example, Shell ‘losing’ billions of barrels of proven reserves, while solid rates of exploratory wells coming good support sharp rises in market capitalisation values.
The ISIS Select Trust investment trust, which Mitchell manages, is investing in the belief that demand is continuing to grow globally for oil, while production will lag, causing long-term support for oil at a price of about $40 per barrel.
Mitchell’s example is China and India, which currently consume about 2 barrels per day per person; if that consumption increases to 5 barrels per person per day, then global consumption goes up by some 33% overall.
While smaller E&P companies offer investors both growth and income potential, majors such as BP and Shell are unable to match the possible returns by virtue of their already gargantuan size.
A key unknown is the amount of oil still untapped in the six major Saudi fields, which account for 95% of output from Saudi Arabia, Mitchell says.
Recently rising oil prices “are not a shock by historical standards,” Mitchell says, but the marginal additional cost of energy on the average UK household will start to have an impact, particularly if oil prices do not fall to 1990s levels.
Mitchell says it is unlikely oil prices would fall back to such levels again.
Robin Batchelor, manager of the Merrill Lynch New Energy Technology investment trust, agrees with Mitchell’s analysis, but adds there are no “quick fixes” to the issue of energy sources and use.
His fund focuses on alternative energy production – such as wind power – transportation power – such as so-called hybrid powered cars running on petrol and electricity – and stationary power generation, which can help overcome spikes in the power grid.
He says there are many companies benefiting from government subsidies and tax breaks to encourage alternative energy, but also a growing realisation that such solutions are price-competitive with traditional sources of energy.
”This is a niche fund,” Batchelor admits.
The bets are long-term and risky, but by, for example, ensuring smaller companies in which the funds’ assets are invested are partnered with bigger firms such as General Electric of the US, the risk is reduced.
Since launching in 2000 at a price of £1 per share, the New Energy Technology trust has slumped to about 22p as investors have sold off technology stocks in general.
Batchelor has no idea of when the market will start to price the fund’s assets at a level, which enable original investors to break even, but he says the trend forward is inevitable – if very long term.
”Costs of producing electricity by wind are coming down by 5% per year, which is making such energy competitive,” he says.
The US alone requires an additional $50bn in energy infrastructure capital expenditure over the next 10 years to avoid crippling black-outs caused by ongoing underinvestment.
http://db.riskwaters.com/public/showPage.html?page=191247