Stephen Bailey has made a complete U-turn on oil stocks, moving from a zero weighting in his Liontrust Macro Equity Income fund less than six months ago to more than 10 per cent today.
In an article published in 2016, the manager revealed he had completely sold out of the likes of Royal Dutch Shell and BP on concerns about the long-term prospects for the oil & gas industry.
Source: FE Analytics
“The improvement in electric cars and increased battery power is rising exponentially and over the next five to 10 years will certainly have an impact on the demand side of crude oil,” he said at the time.
“Saudi Arabia has unveiled a vision of making its economy less reliant on oil and gas by 2030. It announced $65bn expenditure on public programmes and plans to float 5 per cent of its state oil company.
“So, if you are a conspiracy theorist, I’d suggest the Saudis might think the game is up for fossil fuels.”
However, Bailey has now completely changed his mind, saying that far from being a threat to the business model of the oil majors, decarbonisation could usher in a new era of profitability.
“You’ve got this move away from traditional businesses towards new opportunities in the power generation market,” he explained.
“This will be from renewables rather than from the more traditional power supply sources, so there are opportunities there and I think it looks very exciting.”
Bailey (pictured) is particularly enthusiastic about the prospects for Shell in this regard, pointing out it plans to invest $1bn to $2bn a year in renewables and low-carbon businesses.
So far this year, Shell has already bought Sonnen, which makes batteries for storing solar energy generated in homes and small businesses, and Greenlots, a developer of electric vehicle-charging technology.
“At some stage in the future, it wants to be a one-stop shop for your energy and car requirements,” Bailey continued.
“There are ambitions to supply you with household electricity and gas, and maybe provide you with the ability to charge your car. At the same time, if you then take your vehicle away from the house, it can provide you with rapid charge electricity, or indeed, petrol or diesel.
“So it has these ambitions moving forward. It’s a huge business to turn around. But I think this gradual movement towards it is encouraging.”
Research from Nissan released last week found the number of charging points for electric vehicles in the UK had surpassed the number of petrol stations, while the ‘Britain Under the Bonnet’ report from Close Brothers Motor Finance indicated two in five drivers are considering an electric vehicle as their next car.
However, while the move towards electric vehicles and decarbonisation looks to be approaching some sort of tipping point, wouldn’t the falling cost of solar panels and the improvement in energy storage technology allow consumers to generate power themselves, completely bypassing the suppliers?
Bailey’s co-manager Jamie Clark thinks this is unlikely to take place on a significant scale.
“In respect of microgrids, it is correct they can have an impact on energy provision as we understand it presently,” he admitted.
“But it is one of those sectors that will remain regulated by definition because these are utility-like returns. I can’t envisage a time or a point where individuals are permitted to provide their own energy requirements without some kind of intermediary, which has got to be some sort of National Grid type-organisation.”
Bailey and Clark are not the only managers who are positive on oil stocks due to their renewable energy ambitions. In an article published on FE Trustnet earlier this year, Jamie Ward, manager of the FP CRUX UK fund, said: “If you actually read the rhetoric from the oil companies, most of them are keen on the end of oil because they can lock in energy prices elsewhere. They understand the market better than we do.”
However, he said he was more positive on BP as a result of concerns over corporate governance issues at Shell.
Bailey is also optimistic about the prospects for oil in the near term. He said there is more evidence of OPEC (Organization of the Petroleum Exporting Countries) members working together, which gives it the ability to control the market more effectively.
He added that the oil majors are also taking a more prudent approach to capital expenditure.
“We see that companies such as BP and Royal Dutch Shell are now, I wouldn’t say copying, but following the large diversified miners,” he continued.
“They are looking at value over growth, and working from existing installed capital, intent on making returns to shareholders rather than pursuing a growth trajectory.
“I think with Royal Dutch Shell this is very evident when you look at their plans to return £125bn to shareholders over the next few years. It is a good time to be a shareholder, I would suggest.”
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
Data from FE Analytics shows Liontrust Macro Equity Income has made 263.91 per cent since Bailey joined in October 2003, compared with gains of 222.37 per cent from the FTSE All Share and 196.49 per cent from its IA UK Equity Income sector.
The £89m fund has ongoing charges of 0.91 per cent and is yielding 5.72 per cent.