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Shale sector survival: where to invest in the under pressure industry

Shale sector survival: where to invest in the under pressure industry

The huge knock-on effect of the drop in the oil price has had ramifications across multiple markets and sectors since the latter part of 2014.

While emerging markets and high yield bonds have been heavily hit, perhaps more prominent is the pressure on shale oil and gas.

This major energy advancement, heralded as the shale ‘revolution’ in some quarters, has come under increased pressure as the input and production costs for crude oil fell sharply.

Fund managers such as Citywire + rated Duncan Goodwin have predicted pronounced consolidation in the sector as firms attempt to mitigate the margin squeeze by reducing rig counts.

With oversupply and demand still in its infancy, is there still hope for investors in the shale story over the short-to-medium term? Citywire has collated the views of two energy experts to uncover how they are facing up to the fight.

Time to get selective

According to Sébastien Lagarde, who runs the AXA WF Framlington Junior Energy fund, there are opportunities but it is no longer the multi-stream improvement investors first dipped into.

‘Whilst near term visibility on the direction of oil prices remains sketchy as there are still many moving parts influencing energy supply/demand dynamics, we believe that oil prices will remain high over the long term, reflecting high marginal cost of production.'

‘Lower production costs in the US are really an exception, which represents around 10% of global oil supply. Our stance on unconventional energy remains positive but investing in the sector requires highly selective stock-picking as the most leveraged names will continue to suffer in a lower oil price environment.’

‘We also believe that there are some extremely interesting opportunities in companies which will benefit from higher production volumes such as transportation, storage, pipeline and refining businesses. We have therefore increased our exposure to midstream and refining names in the recent correction.’

‘Transportation, storage and refiners now represents 32% of the portfolio vs 18% a year ago. Over the last few weeks, as the oil price rebounded, we have selectively bought back some North American E&P names (i.e. Canadian companies which have been oversold in the slump), and some oil services companies in which we saw long term value opportunities.’

Slowing but not stopping

The strong advancements in shale are one of the factors which prompted the price plummet, says John Devir, manager of the PIMCO MLP & Energy Infrastructure fund, and now it must adapt.

‘We expect the recent declines in oil prices will impact US shale production in 2015 and 2016.  However, it’s important to highlight that production will continue to grow, albeit at a slower pace.’

‘We believe that the combination of continued modest global demand growth, coupled with slower North American production growth will stabilize oil prices by the end of 2015, although there is likely to be volatility in energy prices in the process.’

‘With that projection, we will continue seeing pressure on oilfield services and independent exploration & production firms that don’t have strong balance sheets to withstand currently low oil prices.’

‘However, we see value in equity and debt of higher quality midstream energy firms, as they earn the majority of their cash flows via guaranteed, fee-based contracts which are backed by long-term commitments from highly rated customers.’

‘Midstream energy companies typically have minimal commodity price risk and are more dependent upon continued growth in US production.’

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