Interactive Investor

20 shares to benefit from oil price recovery

2nd September 2015 14:40

Harriet Mann from interactive investor

Aside from a snap rally injecting some much-needed excitement earlier this week, the tired oil market has been trudging along the same bear path for over a year. Its challenges are well known, but with valuations at their lowest for two decades, HSBC reckons there are opportunities to be had and has an 'overweight' rating on the sector.

"We are equity strategy overweight energy," writes HSBC strategist Ben Laidler. "It is the most unloved sector globally, relative valuations are at 20-year lows, earnings expectations have halved, and HSBC sees a gradual move higher in oil prices."

The bank's analysts are confident that low crude prices and lower costs are creating a positive risk/reward balance in the energy sector. Tasty dividend yields are up 7-8% for many integrated companies, and there doesn't look to be much risk either.

"Balance sheets are strong, and disposals and scrip dividends add considerable flexibility. Declining capex and operational expenditure are improving free cash flow break-evens materially," adds Laidler.

HSBC's global integrated oils analyst Gordon Gray has cut his Brent forecasts to $55.4 a barrel for 2015 and $60/70/80 a barrel for 2016-18. This gradual recovery is the result of unabated supply pressure from OPEC rather than weakening demand, he says. However, rebalancing is already underway, which should inject confidence in the longer-term outlook.

And HSBC's in-house expert Volker Borghoff has screened for the large-cap ($20 billion-plus) stocks most correlated to higher Brent crude prices.

(click to enlarge)

Historically, oil corrections trigger different reactions from developed and emerging markets, with more mature economies doing best. With lower prices putting pressure on inflation, this will be felt hardest in emerging markets where energy prices are more heavily weighted in inflation indices.

In developed markets, policymakers are expected to delay tightening monetary policies, especially after recent market weakness. Investors should also keep an eye out for weakening currencies versus the dollar.

"Fundamentally, we see lower oil prices as a growth issue in developed markets, and an inflation issue in emerging markets," said Laidler.

At 3.7%, Asia excluding Japan has the highest corporate cost exposure to oil prices as a proportion of total revenues, followed by Latin America and Japan (at 2.1%). Lower oil prices could add 150 basis points to margins in Asia, excluding the impact of hedging policies and tax components. The industrial sector has a 3.9% average weight of oil costs/revenue, followed by energy, materials and utility.

From the 16 companies with the highest estimated oil usage as a percentage of revenues, US rail companies and global shippers have underperformed against Japanese power companies and airlines. Consumer confidence in developed markets has been rising steadily, as people feel the effect in their wallets, although this hasn't flowed through into revenues, which are unusually low as a result of declining global growth expectations.

With Brent crude sitting 60% below last year's highs, a snap rally pushed the price of a barrel up 25% in just three trading sessions on the back of slowing US production and OPEC comments. Clearly, many investors were swept up in the momentum, but hedge fund manager Pierre Andurand kept his cool. In fact, the oil bear reckons oversupply in 2016 and 2017 could push the price to below $30 a barrel, the Financial Times reported recently.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.