Written by Bianca Hartge-Hazelman, Sydney Morning Herald. Clime Asset Management’s Chief Investment Officer, John Abernethy was interviewed for the following article, published in Business Day, Sydney Morning Herald on 14 January 2015.
Beaten down Australian energy companies are no longer the pick of some fund managers, who are building up positions in offshore giants as a way to fight the plunging oil price.
Clime Investment Management chief investment officer John Abernethy has been accumulating shares in US energy companies such as Chevron and Exxon because of their diversification benefits.
“They are vertically integrated energy companies in exploration, they own their own reserves, they also do significant consulting work to governments,” he said. “They are also renowned around the world as the major extraction companies of the world. They are making profits at different levels and are distinctly different businesses to those presented in the Australian market.”
“We are now seeing the problem of being a price-taker in Australia.
“Australian energy stocks do not present the same opportunities as overseas stocks because we are mainly producers and there is very little value add.”
BHP Billiton, Woodside Petroleum and Santos are all very exposed to the oil market, and analyst say even reductions in their business costs won’t be enough to fully offset the impact of the commodity price falls.
Australian energy and material stocks were the worst performers in 2014 due to the pressure of lower commodity prices.
The price of Brent crude oil fell below $US45 a barrel on Tuesday – down more than $US60 since June last year – as the US and United Arab Emirates, a leading OPEC producer, promise to keep increasing production despite a global oversupply that is driving prices to their lowest levels in nearly six years.
Prices have fallen significantly and dropped 50 per cent last year – the most since the 2008 financial crisis.
The GFC low for Brent of $US36.20 a barrel, struck on December 24, 2008, is now looming as a real threat to global energy producers, many of whom have seen the value of their companies drop as the supply glut continues.
Mr Abernethy, who is also invested in BHP in Australia, thinks that consumer-focused stocks such as Woolworths and Coles are more attractive options than the broader Australian energy sector, should the oil price remain low.
“Beneficiaries of the oil price are likely to be Woolworths and Coles. For them the cost of doing business becomes cheaper, such as the cost of freight and petrol.
“On the other hand, BHP will lose out on oil but it will pick up on the cost of extracting. Having said that, today it is losing more than it is picking up,” he said.
He added that companies like Santos, which is considering selling its Gladstone LNG pipeline, are needed in Australia to develop gas and oil but the downside of commodity prices is hurting companies that don’t have a “value-add strategy”.
Credit Suisse oil and gas analyst Mark Samter said while it is unclear just how much further oil prices will fall, what investors also need to consider is the impact of a price recovery and what that means.
“Equity markets have to get their heads around the speed of the recovery when it happens,” he said.
“Through the global financial crisis, the oil price recovered in six months. The cause of that then was more financial markets-driven rather than the oil market supply and demand issues we are currently faced with.”
Mr Samter said that once the oil price recovers, Santos and Origin Energy should experience bigger gains than Woodside because they have been punished more by investors due to having weaker balance sheets.
Brent crude, the main international benchmark. was last trading at $US46.50 a barrel, down 1.96 per cent, while West Texas Intermediate lost 0.43 per cent on Tuesday and is trading at $US45.87 a barrel.
The oil price has a history of recovering, and this generally bodes well for shares. The oil price falls into 1986 and 1998, both of which saw oil fall to around $US10 a barrel, were in major bull markets.
A lower oil price was also helpful to economic growth during the 1980s in Australia as it helped to the boost consumer spending and lowered business costs.
“Australia is a solid and growing population compared to the rest of the world. Plus a weakening Aussie dollar, which should help tourism, so there is an underlying consumption growth profile to our economy which is pretty unique in the world today,” said Mr Abernethy. “But unfortunately the opportunities to capture this in our market are limited.”