4th July 2013
Standard Life has identified the type of stocks it believes can benefit from the North American oil and gas shale boom.
In its quarterly global outlook Standard Life head of global equities Mikhail Zverev says: “Energy services provider Halliburton is reporting rising demand, particularly for its pressure pumping technologies. One of Halliburton’s more innovative initiatives has been the recent deployment of a fleet of trucks fired by compressed natural gas. This switch to natural gas is expected to reap considerable savings given the sharp downturn in gas prices as a result of North America’s gas glut. We are increasingly positive about the outlook for Halliburton’s shares given the company’s potential earnings upside.”
Zverev says that US power generator Calpine is benefiting from the resulting shift away from coal-fired energy generation and towards gas and that there are considerable barriers to entry into the market.
“Calpine operates one of the newest natural gas-fired plants in the US. Such plants are extremely expensive to construct, creating significant barriers to entry. Calpine’s competitive advantages are further underpinned by the fact that its key market is Texas. The state is experiencing above-average electricity demand growth and its power grid has limited capacity to cope with this increasing demand. A weak gas price means that Calpine can ramp up power generation at relatively low cost, underlining the value inherent in its gas-fired generation assets. We consider the full potential of these assets is yet to be appreciated by the broader market.”
He says the gas revolution will help selected companies operating within the petrochemicals industry since ethane and propane, which are components of the natural gas stream, are key petrochemicals feedstocks.
“A weaker ethane price has ensured that US petrochemicals group LyondellBasell is now one of the world’s lowest cost producers of ethylene”.
Within the biotech sector where some companies are struggling the fund manager rates US biotech group Amgen’s ability to deliver long-term structural improvements in productivity and discern value in its biologics R&D. “This, in turn, is causing us to become more upbeat on its product pipeline, which includes treatments for melanoma and ovarian cancer, as well as a drug to lower cholesterol. In our view, the value inherent in this potentially promising pipeline is not fully reflected in Amgen’s share price”.
In a similar vein, the fund manager believes that Swiss biotech Roche is poised to benefit from what appears to be a very strong product pipeline. It also has an “growing capacity to withstand competition for its leading oncology franchise from cheaper ‘biosimilar’ therapies by expanding and enhancing its product portfolio.
“Meanwhile, some of the “biosimilars” that seemed set to challenge Roche drugs once they came off patent have themselves been coming under pressure. Several have flagged difficulties as they have sought to bring their products to market.”