Oil Shares

We invest in smaller, exploration and production focused companies for the following reasons:

  • We believe that the world is still in a super-cycle demand environment for oil. Demand is driven by industrializing China and India but also by other emerging and fast growing economies such as Brazil, Russia and the Middle East;
  • Discovered, easily accessible oil reserves around the world are believed to be declining. The recent giant oil discoveries off-shore Brazil are at such high depths of water and several thousand meters below the seabed that their extraction is technically very challenging and costly. Some analysts believe that these reserves may not be economically viable at oil prices below $85/barrel and the oil price collapse of late 2014 makes their future uncertain;
  • The integrated oil majors are suffering from declining reserves and large investments in infrastructure, such as storage, transportation, refining, chemical processing and distribution which are businesses not influenced directly by rising oil prices;
  • Companies which control material reserves and are extracting these at growing, more efficient, rates benefit from a double re-rating potential – first from rising sales prices and second from the growth in production. In addition, competent management teams should continue to explore for new reserves and this exploration activity can be another material driver in these companies’ valuation if it is particularly successful;
  • In the recent, low oil price environment, we are focusing on producing companies with long life of reserves and high operational elasticity. Such businesses benefit from a strong balance sheet and the ability to scale back capital expenditure in line with cash-flow generation.  In a volatile oil price environment, they are best positioned to respond quickly and capitalise on the probable adjustment of supply-demand dynamics and oil price recovery.