Investing in the oil majors

When Russia invaded Ukraine last week, global stock markets tumbled. The Euro Stoxx 50 fell 5.08% that morning, while trading on the Moscow Stock Exchange was completely suspended. The FTSE 100 fared slightly better falling around 2.4%, thanks partly to it having a large weighting towards the energy sector – a sector that is benefiting from a jump in oil prices.

As well as the possibility of huge loss of life, the war, which has been condemned by a number of world leaders, has unsettled markets due to the impact international sanctions on Russia could have on energy and resource supply chains out of the country.

The price of brent crude hit $100 (£75) a barrel for the first time since 2014 – when Russia annexed Crimea. Shell’s share price rose, while BP’s dipped slightly due to its near 20% stake in Russian oil producer Rosneft.

Oil companies on the up

Oil companies have in fact been benefiting from rising oil prices for some time now and some of the industry’s biggest names have reported staggeringly high annual profits in recent weeks.

Shell recorded a bumper $19.3bn (£14.2bn) profit in 2021, while BP achieved an impressive $12.8bn (£9.4bn) over the same period – its highest for eight years.

Their phenomenal success has been attributed to a combination of surging oil prices and recovering demand in the wake of the global Covid-19 lockdowns.

The spot price of Brent crude oil, a global benchmark, started 2021 at $50 per barrel and has now topped $100.

Share prices soar

Unsurprisingly, their share prices have also soared. BP has seen its stock price rise 25% over the past year from 299p to 368p*. The last 12 months have been even more lucrative for Shell. The company’s stock has increased almost 40% from £14.81 to £20.06 over this period*.

This has obviously been welcome news for investors that had watched as coronavirus caused shares to slump dramatically in March 2020.

The timing of the announcements, however, was pretty awkward. Admitting to bumper profits when soaring energy costs are helping to push up the cost of living won’t endear you to many people.

So perhaps unsurprisingly, they triggered calls from UK politicians for the introduction of a windfall tax on oil and gas companies.

However, the oil companies have been defended by the Jupiter Merlin team. In an analysis, they asked those calling for the introduction of punitive taxes to ask themselves what it is they are trying to achieve. “It might be popular and populist, and make good short-term headlines, but making such companies uninvestable by inflicting death by a thousand cuts is no way to keep the lights on,” it stated.

The team at Jupiter also pointed out that “almost everybody loves to hate oil companies” – even though they will be a key part of the gradual move towards alternative sources of energy. “We see the big integrated energy companies as being an essential part of the transition process, not only continuing to meet the short and medium-term demand for oil, but also re-investing significant sums in new, alternative fuel sources,” it stated.

It also highlighted that the oil majors needed to be able to invest in alternatives in order to remain sustainable businesses. “All of which requires investment backed by access to affordable capital,” it added. “If on top of all the obvious challenges, the companies’ ability to generate their own capital is compromised by punitive taxes, so the onus is increasingly to find outside capital to do the job.”

However, it warned that third-party investors will weigh up the risks against the potential returns. “If the barrier or hurdle rate is too high, particularly if pushed that way artificially by government action, investors take their money elsewhere, capital dries up, the businesses wither and die,” it added.

Oil still attractive to income investors

So, what investment funds can give you access to the oil industry majors? Well, the status of these companies as established dividend payers makes them attractive to income-seeking investors.

Rathbone Income

Both BP and Shell are currently top ten names** in the Rathbone Income fund run by Carl Stick and Alan Dobbie*. In a recent update, the managers noted how the success of the oil giants had helped them fund positions in other businesses, such as retailer Games Workshop and recruitment consultant Hays. “Following an extended period of good performance on the back of a soaring oil price, we have taken a little bit of money off the table by trimming Shell and BP,” they said.

Schroder Income

Shell and Eni SpA, the Italian oil and gas company, and BP are all among the top ten holdings** of Schroder Income fund run by Kevin Murphy and Nick Kirrage**. This is a deep value driven fund, investing in companies valued at less than their true worth and waiting for a correction. It is a fund that seeks to balance dividend yield with dividend growth and balance sheet safety to achieve a growing income.

Artemis Income

BP is currently the second largest holding in the Artemis Income fund**, which is managed by Adrian Frost, Nick Shenton and Andy Marsh. Their portfolio aims to provide investors with a steady and growing income along with long-term capital growth. At least 80% of the fund will be in invested in the UK. Its holdings tend to be stable, well-established businesses with the financial strength to pay solid dividends to their shareholders.

Of course, not everyone will want to invest in oil. James Yardley, senior research analyst at Chelsea Financial Services, said: “This might be quite a good trade currently, but personally I why would caution a long-term investment in the space. The higher price of oil, gas and petrol will only help accelerate the renewable energy and electric car transition. And, as we know, oil can be extremely volatile. The shale gas reserves in the US have also probably put a cap on how high prices can go and many OPEC countries will be very keen to take advantage of this one last hurrah for oil by pumping out as much as they can. 

“An alternative option would be to look at some renewable energy names. Many of these have sold off recently, however, they benefit just the same from higher electricity prices which are now a multiple of the price they were a year ago.”

Funds in this space include VT Gravis Clean Energy Income and Ninety One Global Environment

*Source: Google finance, 24 February 2022
**Source: fund factsheet, 31 January 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.

Published on 25/02/2022