Will Bartleet, CIO and Portfolio Manager of Pacific Multi-Asset
Opportunities in energy stocks
Energy companies have been in the doldrums for a decade, generating no returns for investors despite generous dividends, whilst global equities have returned nearly 80%. The obvious culprit has been the oil price which is down by a quarter over the same period as the phrase “commodity super cycle” crashed out of the investment lexicon. With the usual enthusiasm to build capacity in the good times, oil companies kept on spending for a full five years after the peak in the oil price. The additional capacity pushed the market into over-supply and the oil price crashed a year later. Not so super.
Another five years on and the cycle turns again. Capital expenditure has more than halved from its peak and the oil price has rallied by 200% from its low in 2016. The combination of higher prices and lower costs has boosted the free cash flow generation of the largest oil companies to levels last seen in 2012 when oil averaged over $110 per barrel. Brent crude oil is currently just under $80 barrel and looks set to move higher on the back of OPEC production cuts, falling inventories and increasing tensions between the US and Iran.
Until very recently the equity market’s response has been sceptical, to say the least. The energy sector as a percentage of the total market hasn’t increased despite the powerful rally in the oil price. This is quite normal. Energy stocks typically don’t start to outperform for nearly two years after a major low in oil prices. But the good news is that energy stocks then typically outperform for several years. Until the cycle turns again.
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