BlackRock Inc., the world’s biggest money manager, says the global market rout may be a chance to pick up energy stocks as a shortfall in global crude production underpins oil prices.
Oilfield services companies such as Schlumberger Ltd. make up four of the top 10 holdings of BlackRock’s $6 billion BGF World Energy Fund, run by Robin Batchelor, 40, and Poppy Allonby, 33. They provide equipment, engineering expertise and people to drill and maintain wells. Oil explorers that don’t need funding for drilling may also be a good bet, they said in an Aug. 10 interview in London.
“We are starting to see some service price inflation,” said Batchelor, who studied geology at the University of Glasgow. “This should benefit oil service companies if oil prices stay relatively high.”
Batchelor and Allonby join billionaire Warren Buffett in arguing the slide that wiped more than $6 trillion off global equity markets since July 26 may be an opportunity to buy. Brent crude prices have dropped 9 percent in the past three weeks on concern the global economy is slowing. Oil has fallen less than equities, where the MSCI World Index has slipped more than 12 percent.
Problem of Supply
“What keeps us from getting too bearish over the medium term is the problem of supply,” said Allonby, who holds a degree in physics and has managed the fund with Batchelor since it launched a decade ago. “It is clear that we are seeing weakness in demand. But less attention is being paid to the supply dynamic. It is the balance of demand and supply that counts longer term.”
Global oil consumption will increase by 1.2 million barrels a day this year and 1.6 million barrels in 2012, according to the International Energy Agency’s Aug. 10 report. Batchelor and Allonby expect oil supply growth to fall short of demand every year to 2015, only coming close in 2014 as production from Iraq comes through.
The BGF World Energy Fund has beaten the MSCI World Energy Index every year except two since 2002. Through July of this year, it returned 3.8 percent, compared with an 8.6 percent return on the index in 2011. Since July 26, the MSCI World Energy index has plummeted 16 percent.
European stocks climbed today, extending the Stoxx Europe 600 Index’s rally from a two-year low.
Slowdown or Recession?
“The question everyone’s considering is, is this a slowdown or a recession?” Batchelor said. As a precaution, “our fund has taken some bets off the table.”
The oil services sub-index of the U.K.’s FTSE 350 stock index has tumbled 19 percent in the past three weeks. U.K. exploration and production companies have fallen 14 percent in the global rout.
The pressure to increase output to meet global demand may allow services companies to charge their customers more even if oil prices slip further, Blackrock said. Schlumberger, National Oilwell Varco Inc. and Halliburton Co. are the third, fourth and fifth biggest holdings. Technip SA, the French services company, is the ninth.
The energy fund’s two biggest holdings as of the end of July were U.S. explorer Anadarko Petroleum Plc and BP Plc.
The world’s biggest oil companies such as Exxon Mobil Corp., Chevron Corp., BP and Royal Dutch Shell Plc typically don’t perform as well as explorers and services providers when oil prices are rising, though they also won’t fall as quickly if oil prices collapse, they said.
Conoco, Marathon
The plan by ConocoPhillips, the fund’s 10th largest holding, to spin off its refining unit into a separate company will add to returns for investors, they said. Marathon Oil Corp., which completed a similar move this year, was one of the fund’s biggest holdings before splitting in two.
“We like majors if they’re cheap versus peers and we can see how they can release value,” Batchelor said. “Recently, people have been focused on Conoco’s announcement to split. However the real action started a few years ago when it announced that it would sell assets, reduce spending and, importantly, return the proceeds to shareholders.”
The fund also has Occidental Petroleum Corp. and BG Group Plc in its top 10. Houston-based Noble Energy Inc., an explorer with assets in the U.S., Africa and the Mediterranean, is the eighth-biggest holding in the fund.
“You have to distinguish between the exploration and production companies that need to raise money and those that don’t,” he said. “If the companies live within their cash flow and funding, we might want to pick them up in a downturn.”
The drop in crude prices may hurt many oil explorers with weak balance sheets, Batchelor said. He prefers companies with strong assets and catalysts that may cause shares to perform regardless of oil prices.
“We don’t currently think this is a long-term down trend,” Batchelor said. “But we’re watching the economic indicators closely.”
