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BLOG: Is it too late to profit from the oil and energy boom?

Written by: Ben Yearsley
Oil has had a tumultuous two years and sadly, energy price hikes are at the fore for millions. But as an investor, can you still profit?

Cast your mind back to ‘lockdown 1’ in April 2020 in the first wave of the pandemic when the world was shut down; no travelling, no fun and no one wanted any oil. What was the point of it as you weren’t allowed to go anywhere?

In that weird, mad month just after stock markets bottomed, the price of oil actually turned negative. Bizarrely, you were paid to take delivery of oil. However, that was for a specific oil contract, and you had to take physical delivery of it the following day – and all storage facilities were full as no one was using the stuff.

But even the spot price of good old Brent oil (one of the two types of oil commonly mentioned when quoting a price) touched $21 a barrel, compared to a price today hovering around $90.

Decarbonisaton and net zero

Should you be investing in oil when the world is trying to decarbonise? The simple answer in my opinion is yes. Reliance on oil isn’t going away overnight – it is highly likely we will still be using lots of the stuff for the next 30-40 years.

The other thing to consider is who will be the energy providers of the future? My hunch is the likes of BP and Shell will be at the forefront. They have the distribution chains and knowhow to deliver and will transition over time to cleaner, greener fuels. It is better having these companies listed in the public market than go private – which is what happens when markets shun companies.

Is it too late for investors to get involved?

BP and Shell (and most oil companies) have worked hard over the last few years to become more efficient and better run – at $90 a barrel of oil they are printing money. With less capital expenditure due to decarbonisation, there is lots of money available to pay dividends, pay off debt, invest in renewable energy, and do share buybacks. This makes them pretty shareholder-friendly.

Despite share prices almost doubling in lots of cases, prices still don’t look high, and even if the price of oil falls back, many companies are in good shape. Two US oil majors have just reported 2021 profit figures: Exxon made $23bn and Chevron $15.6bn…not too shabby.

How can you invest?

Firstly, there is no way for nervous investors to invest in oil. It is volatile and share prices swing sharply, either with the price of oil or with good or bad economic news.

There are various ways to invest; buying shares in the likes of BP and Shell, or buying a fund or investment trust. Each comes with its own risks and potential rewards.

Buying into BP or Shell for many could be a good option, as long as you spread your risk with other investments – don’t put all your eggs in one basket. One benefit of investing in single companies is that it keeps your investing costs down and you always know what you own. The downside is single company risk – just look at BP’s Deepwater Horizon disaster over a decade ago to see the cost to the business.

The final way is via funds or investment trusts such as Schroder Global Energy or Riverstone Energy. The key benefit of buying these pooled investments is professional management, and a broad spread of global energy companies in the trust or fund.

And finally…

Going back to decarbonisation and net zero…if oil is not the future, what else can you invest in that is? Well, the obvious answer is renewable energy.

Luckily here in the UK we have a huge, listed investment trust sector dedicated to investing in renewables from wind power, hydroelectric, solar obviously, and also battery storage.

Trusts such as Downing Renewables & Infrastructure, Greencoat UK Wind, and Gresham House Energy Storage may be worth looking at. Beware high prices and trusts trading at a premium to their net asset value (NAV) though as the sector has been in strong demand due to high inflation-linked income streams. You could also consider funds such as Active Solar, and Schroder Global Energy Transition (amusingly managed by the same person who manages the Schroder Global Energy fund).

Realistically, most investors should look at getting exposure to ‘clean’ and ‘dirty’ energy. We all need and depend on it and that is often a solid basis for inclusion in investment portfolios.

Ben Yearsley is investment director at Shore Financial Planning

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