JPM Natural Resources stays shale gas course while avoiding oil majors

JPM Natural Resources is sticking with its strong bets in shale gas producers and explorers despite overproduction sending the oil price to multi-year lows.

The oil price has fallen off a cliff since mid-September when disappointing global growth figures put the demand for oil in doubt. That was compounded at the latest Opec meeting, when the oil cartel did not cut its production to protect the price of their cash cow.

The shale gas price is strongly wedded to the cost of conventional oil, and the low value is below the cost of production for some companies.

JPM Natural Resources client portfolio manager James Sutton says the £826.2m fund, lead managed by Neil Gregson, holds 10 per cent of the portfolio in unconventional gas producers.

“Throughout this time we haven’t had large exposure to the oil majors, except Shell which we sold in June after buying in at the start of the year.

“We’ve been massively underweight which has been painful because when the oil price falls those companies hold up much better.”

The fund has lost 12.6 per cent in the year to date, compared with the top performing 

Over the three years to 4 December, the fund has slumped 43.5 per cent compared with the Euromoney Gold Mining & Energy index’s 34.2 per cent fall.

“With the benefit of hindsight, three months ago we would have moved to oil majors and now be reallocating to the unconventional oil and gas producers.”

Oil majors have been protected by their dividends, however the unsustainability of those yields are what kept JPM from investing in them, he explains.

“They lacked the free cashflow and ability to pay dividends when the oil price was at $105 a barrel so we’re even more worried about that at $70.”

The unconventional producers have been “hammered” in the past few weeks. Most of them are selling on forward contracts so the price will not hit them fully for another six months, he adds. 

The unconventional oil and gas companies are not identical, he says.

Some have precarious balance sheets and marginal prospecting areas, whereas others are solid with high-yielding sites.

If the price remains stubbornly low in six months, the weaker unconventional producers will cut output, he says. Because of the much lighter capital investment in shale compared with conventional crude rigs, that will be the regulator valve, he says.

He is still optimistic about the need for greater production, however, as the 93m barrel a day global supply is declining by roughly 5 per cent each year as sites atrophy, he says. Coupled with another 1m-odd barrel/day growth in demand, there is scope for good producers to grow profitably, he says.

“The return of 800,000 barrels of Libyan oil each day caught everyone by surprise. But that could easily disappear again if you see civil strife there so I do think it’s a pretty well-balanced market and it wouldn’t take much to get us back to back into a state of equilibrium.”