LONDON Asset manager Ashburton has raised the energy exposure in its European equity fund to a record 48 percent, betting that the high oil price will benefit companies making big finds against a backdrop of declining production from existing oilfields.
Brent crude oil futures are currently trading at about $122 a barrel, rewarding exploration and production (E&P) companies making big discoveries and oil services companies that provide drilling rigs and vessels as day rates rise.
"The combination of steep production declines in existing oil fields, a strong oil price, and a shortage of equipment capable of drilling this oil is leading to a strong pricing dynamic," said Richard Robinson, manager of the Ashburton European Equity Fund.
The fund is up 1.57 percent in the 12 months to end-February according to data from Lipper, a Thomson Reuters company. It also outperformed its peers in the Lipper Global Europe Equity sector by 8.24 percentage points over the same period.
Economists have expressed concern that high oil prices will crush demand, but Robinson said Brent was still below the key level. "The magic number is about $130 a barrel, which would represent about nine percent of (global) GDP - that's when demand destruction tends to set in," he said.
But he expressed concern about a potential conflict with Iran, which could move the market up some $20-$40 a barrel, he estimated, well beyond the $130 level.
In such an event, he would switch to more defensive plays such as integrated oil and gas companies. "The market would get fearful and be looking for the big dividend-payers," he said.
For the time being, however, Robinson is focusing on stocks that stand to benefit from major oil discoveries such as Statoil (STL.OL), Ophir Energy (OPHR.L) and Afren AFRE.L. The 48 percent tilt to energy is a record for the fund, which was 38 percent invested in energy stocks at the end of January.
Statoil has made six big discoveries over the past year, with finds off Norway, Brazil and Tanzania.
Ophir Energy has the surrounding field to Statoil's Tanzania discovery, whilst Afren has exposure to Africa's West Coast. Robinson sees both as potential takeover targets.
Oil service companies such as Deep Sea Supply (DESSC.OL), Farstad Shipping (FAR.OL), and Kvaerner (KVAER.OL) have also performed well as E&P companies compete for rigs and service vessels to get their discoveries out of the ground.
"We see a very tight supply/demand situation for oil rigs in virtually all water depths, but in particular, the high-end ultra-deepwater oil fields," Robinson said.
He highlighted Kvaerner, which makes large steel "jackets" for oil and gas platforms, as a strong performer with a good order book, and pumps and valves maker Weir Group (WEIR.L), which he sees benefiting from U.S. shale gas extraction through hydraulic fracturing, known as fracking.
"They had a good set of numbers but they are probably one of the most heavily-shorted stocks in the FTSE," said Robinson. If the stock does well, a lot of the shorts will have to be closed out, he said. "That could give you a real short squeeze."
The pursuit of U.S. shale gas will also force investment in infrastructure to accommodate the extra gas and oil coming on stream, Robinson said.
He sees this boosting companies such as Tenaris (TENR.MI), which makes pipes and tubes for the oil and gas industry, and gas and storage providers such as Vopak (VOPA.AS), Linde (LING.DE) and Burckhardt Compression (BCHN.S).
(Reporting by Claire Milhench; Editing by Anthony Barker)