LONDON (Reuters) - BlackRock (BLK.N) is overweighting oil-focused energy equities in its World Resources Income Fund, in the view that these stocks are attractively priced with good dividend yields, and as oil fundamentals remain strong, the fund manager told Reuters.
“Our tilt favours energy over mining and agriculture,” said Richard Davis, co-manager of the fund which launched in May this year with some $3 million (1.84 million pounds) under management.
“U.S. crude won’t go much below $80-$90, Brent is at a decent level and earnings for energy companies have been good.”
Brent is currently trading at about $108 a barrel but at the start of August it touched $120. Davis believes that oil prices have been kept at elevated levels due to a tightness in supply, and he does not see this improving in 2012.
But like all equities, natural resource stocks have sold off in the last two weeks as investors have pulled money from risky assets across the board.
The fund targets dividend paying stocks and those with the potential for growth, seeking to strike a balance between large caps such as Chevron Corp, Exxon Mobil and Royal Dutch Shell, and smaller companies such as Enbridge, a North American energy distribution company, and Kumba Iron Ore.
“The big integrated oil companies and diversified miners are inexpensive, they’re on single digit P/E multiples, and they’re reporting record earnings,” Davis said.
Whilst the bigger oil companies and miners are consistent dividend payers, Davis and his co-managers also look for companies that may grow their dividends from a low base, such as Australian iron ore producer Fortescue, which paid its maiden dividend in February.
Meanwhile pipeline and energy transportation companies such as Enbridge offer attractive yields and growth potential because of their exposure to unconventional energy sources.
The rise of shale exploitation has resulted in demand for additional pipeline and processing capacity, and these shares have outperformed given the companies’ low sensitivity to oil price moves, Davis said.
He added that some non-exchange traded commodities such as coal and iron ore had also held up well. “This tells us that the underlying demand is still pretty good,” he said.
Nevertheless, worries about U.S. economic growth and eurozone sovereign debt problems have damaged equity valuations across the board. “But there are good margins in the iron ore business and if you’re a copper producer you are still making a lot of money today,” Davis said.
Key mining stocks in the fund include Freeport-McMorran Copper & Gold, Xstrata, Rio Tinto and BHP Billiton.
Although the gold price has risen by over $300 in the last six weeks, gold miners have under performed. But Davis believes the upcoming earnings season may give the stocks a boost, if gold prices remain elevated.
“Their earnings for the third quarter will be much better than those for the second quarter and they’ll be better year on year,” he said.
“Once those numbers start to come through and the market realises they are making more money, they could get a revaluation. Historically, gold equities do look cheap relative to bullion prices.”
BlackRock manages over $45 billion in commodity equities.
Editing by James Jukwey