Is this a smarter way to invest in oil?

offshore-oil-platform

A couple of years ago the decade-long commodity super-cycle grinded to a halt, on the back of slowing demand from resource-hungry China and the rise of alternative energy sources, including US shale production.

In June 2014 the oil price started its slide, slipping from $110 a barrel to below $30 a year ago. This marked the trough, with the oil price since staging a recovery, helped by the Organisation of the Petroleum Exporting Countries (Opec) agreeing to restrict supply.

For those who are optimistic that oil can continue its recovery, there are various ways to gain exposure, the most obvious being an exchange traded fund.

But as Jason Hollands of Tilney Group points out, those investors who own a UK index tracker are likely to have exposure to the likes of BP and Shell already, considering the oil and gas sector represents over 11 per cent of the blue-chip index.

NEW PLAYER IN TOWN

Additionally, there is also a handful of specialist active funds that buy oil equities.

There will soon be another new play in town - the Guinness Global Oil & Gas Exploration investment trust, which from 9 February will be raising money ahead of a planned IPO.

The trust is seeking to raise between £50 million and £100 million, with the management team claiming the types of share the trust will be investing in will have 'minimum reliance on the oil price to create value'.

Stephen Williams, one of the trust's two co-managers alongside Sachin Oza, explains the trust will be investing in junior exploration stocks, which he says have been the victims of an 'indiscriminate sell-off' as industry capital was sucked into US shale.

He says that today the big oil players need to replace their reserves and will therefore look to snap up assets from the smaller players.

This is a trend the managers are seeking to profit from, 'buying high quality assets at extremely depressed prices' by targeting companies at the early stages of exploration that will attract investment from the bigger oil players.

'We will be buying low development cost assets, which are not oil price-dependent or sensitive to price movements,' says Williams.

'We believe we are at the early stages of a bull market for this part of the market.' He adds that an 'activist' approach will be employed, in order to help unlock the value of the assets.

The managers observe that shale oil developments will not solve the world's growing thirst for oil, further making the point that a much higher oil price than today's $55/barrel is required for most shale businesses to be profitable.

The trust has a four-year investment period. Its annual management charge is priced at 1.5 per cent, with a performance fee of 20 per cent applying if investors receive an 8 per cent annual return, compounded over the life of the fund.


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