Can investors benefit from rising energy prices?

13th November 2013

img

Ben Yearsley, the Head of Investment Research at Charles Stanley Direct, suggests the answer is yes (depending on your experience and attitude to risk) in the article below.

There are a whole host of reasons why energy prices have been rising over the last few years. The profitability of the energy companies is in the spotlight, but this is only one variable. Commodity prices and green taxes are two other major issues. To me it seems probable energy prices will continue to rise, especially in the UK. Successive governments have ignored the pressing need to develop new energy generating capacity; plus the global pressure on finding and extracting oil and gas is intensifying as the global population grows and becomes wealthier, thus consuming more energy. It therefore seems sensible to hedge against rising energy prices over the long term.

So, aside from installing your own solar panel or wind turbine, what are the options to invest in the energy theme? Perhaps most obvious are Exchange Traded Commodities (ETCs) that track the prices of crude oil, natural gas and even heating oil, which is probably the closest for hedging energy costs. Investors benefit if the price rises; but a word of caution is appropriate. Energy ETCs are typically based on derivatives as opposed to the physical commodity, and the prices of these can be subject to additional volatility and the cost of switching from one periodic contract to another. They are therefore suited for more experienced investors who can bear potential losses.

In terms of companies that could benefit from rising energy prices, investors might also look at the tempting yields of energy providers such as Centrica as an opportunity to hedge against higher bills. However, is a yield of around 5% sufficient compensation for the risks of political interference? The key thing to consider is the mix of the business. Are profits more from generating power or from selling it to consumers and businesses?

There are also new developments in the energy markets to consider. Technology is unlocking the potential to find previously inaccessible oil and gas reserves. For instance, the widespread use of hydraulic fracturing, or “fracking” has enabled extraction from previously unviable places. The US is a leader here, and it looks to be having a profound economic effect already. In the UK it could have an impact too and help us become less reliant on imported energy. However, investing in the companies benefiting from the fracking trend such as oil and gas explorer Afren, or Weir Group, which makes pumps involved in the process, is generally quite risky, and there are limited options here in the UK.

Putting your money into any single company carries larger risks, so an energy fund such as Artemis Global Energy or Guinness Global Energy, which hold a number of shares, could be a more prudent approach. There are also more specialist funds such as Pictet Clean Energy, which target companies that benefit from the switch to lower-carbon sources, or Foresight Solar Investment Trust, which invests in ground-mounted solar energy infrastructure in the UK with the aim of producing a high income. As with all investments there are risks involved, but I believe some exposure to these sorts of funds could help diversify a more adventurous portfolio.

Leave a Reply

Your email address will not be published. Required fields are marked *