The oil and gas sector has been a volatile place for investors so far this year. While the price of oil is still well into triple figures, the share price of energy stocks hasn't necessarily followed suit.
So how do you make money from the sector? I spoke to John Dodd and Richard Hulf, who run the Artemis Global Energy fund, to get their views and their stock tips. Dodd has 25 years' experience running money while Hulf is one of the few major investors who has expertise in petroleum engineering.
Perhaps it goes without saying, but the pair are bullish on oil prices, seeing Asian consumption as the main driver. As oil bulls often do, they note that in the US there are 809 cars per 1,000 people, compared with 37 in China.
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Their absolute worst-case scenario - which they use to value companies - is a price of $90-95 a barrel. Below this price, some of the less efficient global operators will start making losses.
That doesn't seem like a huge margin of safety to us. A floor of $95 per barrel seems plausible, particularly if the Middle East spins out of control, but it's not what we'd describe as a worst-case scenario.
We're a lot less bullish on China especially if it doesn't start making major reforms. And while more people in Asia will buy cars, population density will limit sales growth and therefore energy use.
The best ways to play shale energy
However, where we'd agree more is that shale energy is going to be a huge story, particularly in the US. One of their top tips to play shale oil is US oil major, Occidental Petroleum (NYSE: OXY), which is using fracking' technology to boost the capacity of a long-standing oil field in California.
Shale gas is a slightly different story. The US will need to build a lot of liquefied natural gas (LNG) plants if it is hoping to sell its cheap gas in the global market. Even if building started today, this would still take five to ten years. So a better way to play the shale gas boom as far as they're concerned, is to invest in manufacturing firms such as 3M (NYSE: MMM).
But what about competition from the UK and Europe? It's not something Hulf and Dodd are immediately concerned about. Despite the recent excitement over drilling for shale near Blackpool, a European shale gas revolution will be harder to come by.
Why? Because extracting large amounts of shale oil and gas requires wide open spaces and available rigs things which the UK and the rest of Europe don't have.
A couple of promising-looking oil exploration tips
When it comes to oil explorers, Hulf and Dodd don't focus on companies looking for new fields, and nor do they invest in mature fields. Instead, they look for firms that are expanding existing fields. This reduces the technical risk, because there is already oil out there.
On this front, they like OGX. Although it is already Brazil's second-biggest oil company, it owns promising fields off Brazil and Colombia. However, as it's listed in Brazil, it's a major headache for your average British private investor to get hold of.
One intriguing alternative suggested by Hulf and Dodd is Ocean Wilsons (LSE: OCN). This is the UK-listed holding company for a shipping services company in Brazil. The growth of the Brazilian oil industry means that they desperately need to ship in equipment and rigs and ship oil out.
If you're looking for a high-risk play, you might think about Africa Oil (TSX: AOI), say Hulf and Dodd. It has several exciting projects in East Africa, and has recently made a major discovery in Kenya. Although there is still a lot of political risk, it is Canadian-owned so the risk of fraud should be lower. While it has shot up in price over the past few months, they still believe it is very cheap.
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
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