Energy stocks have had a rough time in recent years but value investor Kennox Asset Management sees them as a good bet.
As a strident value investor, Kennox Strategic Value fund lead manager Charles Heenan says it is becoming difficult to find buying opportunities at the 10 times earnings price ceiling he usually aims for.
“Right now it’s really tough for us. A lot of people are really bullish and I can understand why, because the markets are going up. But we’re having a hard time finding the opportunities,” he says.
The £250m fund holds 17 per cent of its portfolio in cash as the managers remain patient.
“The cash is banging against our top level because we’re not finding opportunities. But we’re confident we will and that’s when we will use the cash,” he adds.
Heenan is keen on unloved energy stocks, however.
The energy sector makes up 16 per cent of the fund, with investments in Shell, Norway’s giant Statoil, Canadian natural gas and oil company Encana, and BP.
Heenan is confident in Shell, despite last week’s warning that full-year results are set to fall by almost a quarter to $19.5bn (£11.75bn) because of fourth quarter underlying earnings being cut in half.
The stock fell 4 per cent on the news but has mostly recovered. That shows the low expectations are priced in to the stock, Heenan says.
Kennox Strategic Value likes to buy when stocks are out of favour, so it is a fitting time for the company to be in the fund’s top 10 holdings, representing 4.7 per cent of the portfolio.
“Shell has its problems. It’s an oil tanker, not a speedboat. But we’re happy with the way the sharemarket reacts the way it does,” the manager adds.
“[Big oil companies] are very interesting: There are very low expectations in those shareprices. They just haven’t moved in the last five years when everything else has moved,” he adds.
“The best thing about energy is we always need it. It’s a baseload factor, the global economy needs energy and always will and it gives a certain resilience in very tough times.”
Heenan expects gas companies to benefit from a long-term increase in the price of gas, which offers similar energy output to oil, albeit at a fraction of the price today.
Meanwhile, Julius Baer Energy Transition fund manager Roberto Cominotto says confidence in the global economic picture has driven “a resurgence” in demand for cyclical energy stocks.
“With energy markets at the beginning of a new growth cycle, the prerequisites for solid returns look positive for 2014,” he says.
Shale oil and gas developments has fundamentally changed the North American energy market and created a pressing need to reorganise the continent’s energy infrastructure, he adds.
Cominotto’s €27.7m fund is investing in companies which are planning, building and maintaining the pipelines, refineries and storage facilities.
North America’s energy infrastructure expansion is likely to last for many years, he adds.