Buying opportunity in energy stocks

Oil prices will stay at elevated levels, creating growth opportunities along the entire energy value chain. This includes companies which help us gain access to new resources and which help to improve energy efficiency.

Uncertainties around sovereign debt in Europe and the US have increased investors’ risk aversion. As a result the price of many energy stocks does not reflect their strong growth prospects, creating an attractive buying opportunity.

Wind and solar stocks spiked immediately after the nuclear disaster in Japan and as countries such as Germany and Switzerland decided to exit nuclear energy. We however believe that in the short term, the biggest beneficiaries of the change in attitude towards nuclear energy will be companies involved in power grids, energy efficiency technologies and liquified natural gas (LNG).

Global natural gas reserves are abundant but often not transportable to where natural gas is consumed. LNG will transform the natural gas market from a local market to a global market. Equipment providers for the liquifaction, transportation, storage and regasification of LNG will benefit. LNG is currently the most important substitute for the loss of nuclear power in Japan and will also become one of the most important substitutes globally in the medium term.

Germany will exit nuclear power in the next 10 years. The country has already installed a large amount of wind and solar energy capability, but is now facing grid congestion issues. The German government’s focus is therefore on the expansion and modernisation of the power grid.

China is facing similar issues. It has fast become the largest market for wind installations but one in three installed wind turbines are not yet connected to the grid.

Power grids remain one of our favourite energy investment themes as the global economic recovery continues. After having underinvested for decades, many countries, especially those with fast growing renewable energy installations, are being forced to invest in the grid.

Oil and gas service and equipment companies also offer very attractive investment opportunities. They benefit from the continued need to find new resources and the fact that finding new resources is becoming more complex, enhancing the need for specialist equipment and services.

The industry has entered a new growth cycle which will continue as long as oil prices stay above $70 per barrel. Oil price fluctuations above this level can create share price volatility but have no impact on the profitability of the industry. Prices for services and equipment are now starting to rise and capacity utilisation is rising. This usually leads producers to rush to award projects, and as such we expect order inflow to accelerate further in coming months.

In the short term, the risk appetite of investors and the pace of the economic recovery are going to be the crucial drivers of energy sector share prices. Longer term, resource scarcity and environmental challenges are going to reward investors in companies which will be able to offer solutions to these issues.