Diversified plays on energy upheaval

published 3 December 2013

The energy sector is going through a period of upheaval. Shale gas is giving American firms access to cheap energy, and could rescue Britain from the looming prospect of shortages. Meanwhile, oil prices remain high and interest in renewable energy continues.

As a result a number of new investment trusts, funds and ETFs (exchange-traded funds) have appeared, in addition to the many existing ones. These enable investors to invest in the sector while diversifying their holdings. They also allow access to companies and projects not listed on major stock exchanges.

Riverstone Energy (LSE: RSE) is an energy investment trust recently spun off from private equity firm Riverstone, which owns nearly half of Cuadrilla. The latter owns a large chunk of Lancashire's huge shale field.

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Riverstone will focus on oil and gas exploration projects, including shale. While exploration is notoriously risky, the trust is backed by Sir Robert Wilson (ex-Rio Tinto) and Lord Browne (ex-BP) and currently trades at a 4% discount to net asset value (NAV).

While shale gas has lowered US natural gas prices, they have partially recovered from their trough and stabilised. Fears that shale firms would become unprofitable have eased.

It makes sense to consider a sector ETF such as Market Vectors Unconventional Oil & Gas ETF (NYSE: FRAK). This aims to follow its proprietary index of firms in the industry. Even though it is a specialised ETF, it has a total expense ratio of only 0.54%.

The shale boom won't just benefit explorers and producers. It will also benefit those developing infrastructure. MLPs are a popular vehicle for investing in energy infrastructure projects.

Like Reits, they pay out a high proportion of profits in dividends, making them ideal for income-seekers. The Source Morningstar US Energy Infrastructure MLP UCITS ETF (LSE: MLPS) invests in 39 MLPs equivalent to 97% of the total market capitalisation of this sub-sector.

But shale is not the only part of the sector growing strongly. Even its supporters accept it is still polluting (though cleaner than coal).

World governments are committed to reducing emissions. It makes sense to consider a renewables fund, such as BlackRock New Energy Investment Trust (LSE: BRNE). As well as energy plants, it invests in firms that develop the technology and currently trades at a 6.5% discount to NAV.

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