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Oil prices look set to stay high but there are still problems to face for global energy funds, reports Joanne Ellul

High oil prices and a rising world population are two reasons to consider global energy funds but geopolitical tensions and moves to nationalise oil companies could deter investors.

High oil prices can benefit oil production companies but spikes are usually followed by falls. Global energy fund managers manage price risk through exposure to companies that fit into different parts of the supply stream.

Artemis manager Richard Hulf, who co-manages the firm’s £94m global energy fund, explains that upstream companies produce oil and downstream companies refine and distribute it.

He says: “When the oil price is high, it is good to invest upstream as that supplies crude downstream. The down-stream does not like high oil prices because refineries want to buy cheap oil so that its refining margins can be wider and they make more profit. We are mostly invested in the upstream.”

Hulf says the oil price is used to make assumptions on valuations of companies.

He says: “We need to make base assumptions on the price a company is going to sell its oil at over the next 20 or 30 years to figure out what the company is worth. We take an oil price assumption of $90-$95 a barrel which is a conservative estimate.” One concern about investing in oil companies is the need for them to discover new sources of oil.

Hulf says: “We are not relying on exploration drilling. We invest in companies that have the best projects, strong assets in terms of oil and gas fields and access to capital markets.”

Jupiter fund manager Derek Pound, who runs the £22.5m global energy fund, expects the oil price to stay high this year.

He says: “It will remain above $100 for 2012. The oil price has stayed up for geopolitical reasons. Demand still remains high and the physical market remains quite tight.”
Pound has increased his oil services exposure since the start of the year from 10 per cent to 12.5 per cent.

He says: “I have been lifting oil services this year because the earnings’ outlook for 2012 looks good. I have added to Petrofac and Lamprell this year.”

Another concern for oil companies is the threat of nationalisation. Last week, Argentina announced plans to nationalise oil giant YPF and the share price plummeted on the back of the news.

Pound says: “It is a very dangerous thing for Argentina because it will alienate investors due to the uncertainty it causes in the stockmarket.

“We have a small exposure to Argentinian oil company President Petroleum. I am not going to sell the position because I do not think the government is interested in nationalising small companies.”

Rowan Dartington head of collectives research Tim Cockerill says most investors can get exposure to the large cap energy companies through mainstream funds.

He says: “In energy funds, there is duplication on the larger-cap side as there is a limited selection in the large-cap energy sector. Most investors can get exposure through mainstream funds.

“Smaller companies do not have a lot of liquidity and managers will struggle to sell them and build positions.”


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