“As a result Shell and BP stand at the head of the FTSE 100 leader board today, while oil equipment and services play Hunting and oil producers EnQuest and Ophir Energy top the FTSE All-Share with gains in excess of 6%, even if the broader market is down.
“The oil majors are one logical way of gleaning exposure to any sustained rally in the price of Brent crude. However, bulls of Brent have a range of other options when it comes to how to play an increase in oil prices.
“The more risk that is taken the greater potential reward if oil keeps rising but equally the potential downside would be greater should the rally fizzle out.”
The list below goes from least to most risky:
1. UK equity tracker fund.
BlackRock UK 100 Equity tracker is an OIEC and comes with an OCF of just 0.06%. BP and Shell both feature in its list of top five holdings with a combined weight in of around 6.5%. The total portfolio weighting to Energy stocks is 11.7%. The SPDR FTSE All Share ETF performs the same function and also has top-five weightings in BP and Shell and a 13.1% weighting toward Energy overall.
2. Actively managed UK equity fund
A lot of the top performers in the UK Equity Income category have low weightings in the oils so they have a big decision to take, as to whether to jump back in or not. One fund which already has big holdings in both BP and Shell is Schroder UK Alpha Income, run by fund manager Matt Hudson, where the oil majors are the two single biggest positions and represent nearly 13% of the fund. Martin Cholwil’s Royal London UK Equity Income fund has Shell as its largest holding and BP as its seventh biggest position.
3. Energy-themed fund
One option to consider here is the ETFS US Energy Infrastructure ETF. Listed on the London Stock Exchange, this tracker is designed to provide the performance of a basket of 23 American energy pipeline, storage and logistics firms, a lot of whose share prices have fallen hard alongside the actual oil price. The tracker is SIPP and ISA eligible and comes with a total expense ratio of 0.25%. The tracker offers a dividend yield above 6% and could rally if oil makes sustained gains. Do note that the tracker uses synthetic replication to provide performance, so it does not own the 23 stocks which form the underlying Solactive US Energy Infrastructure MLP Index.
4. Oil trackers
Investors may want to avoid stock specific risk and just follow the oil price. ETFS Crude Oil ETC tracks the US benchmark, West Texas Intermediate, and ETFS Brent Crude the equivalent European oil benchmark. Note that both trackers follow a basket of oil futures prices, not the spot price, and both use synthetic replication (derivatives) to achieve this. Besides movements in the oil futures, investors are also exposed to the roll yield and collateral yield for their total return on investment.
5. Oil stocks
According to the London Stock Exchange’s own website there are 98 oil and gas producers and explorers listed on the Main Market and AIM with a combined value of £270 billion, ranging from Spitfire Oil’s market cap of £900,000 to Shell’s at £168 billion.
BP and Shell are responding favourably to the higher oil price as the higher crude goes the safer their fat dividend yields become – both offer earnings cover below 0.5 times in 2016 and of barely one times in 2017 when a ratio of at least two times is ideal. BP currently offers a 2017 dividend yield of 6.7% and Shell 7.2%, based on consensus analysts’ forecasts.
Less well developed, pure play producers like FTSE 250 firms Cairn and Tullow could also benefit, but the operational and exploration risks are higher here.
Then the riskiest oil plays are the AIM-quoted junior explorers which may not even be producing or have a find, but whose share prices could welcome more positive sentiment toward their industry.
6. Oil equipment stocks
The London Stock Exchange is host to fourteen firms which provide equipment and services to the oil industry with a combined market cap of £9 billion. None of them feature in the FTSE 100, although Wood, Petrofac and Amec Foster Wheeler were all once part of the UK’s elite index. Other names to note include Lamprell, Cape and Hunting, although do note they all have different client, geographic and product exposures.
7. Other overseas markets
Intrepid investors may look overseas for their oil plays. France’s Total, Italy’s ENI, Spain’s Repsol and Norway’s Norsk Hydro are all mega-cap stocks, while in the US ExxonMobil, Chevron and ConocoPhillips can all be easily traded via UK-based brokers and platforms.