Two very different ways to buy into the oil boom

published 17 May 2006

Rising oil prices, China's insatiable demand for commodities and a growing domestic economy meant that the Russian stockmarket provided some of the highest returns around in 2005. At Neptune, we think that, although Russia may not do as well in 2006 as it did last year, there is still plenty of upside to come.

Russia has a strong supply of the soft and hard commodities that are a vital part of 21st-century commerce. Gazprom (OGZD), a Russian gas company, has more proven gas reserves than are held in any other single country in the world. The firm already supplies much of German, Austrian and Italian industry with international pipelines and will soon be providing gas to the UK under agreements signed in 2005.

Gas and oil aside, Russia is also one of the world's largest producers of platinum and palladium. Both are important metals in areas as diverse as fuel-cell production, microchips and, of course, jewellery. Finally, the country is a large and growing producer of gold, which has now moved above $500 per ounce and looks set to keep rising.

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The business climate in Russia improved dramatically during 2005 as the Yukos affair was laid to rest. And the country's financial importance is only going to increase from here: by 2040, the Russian economy is expected to be the fifth largest in the world behind China, the USA, India and Japan and to be ahead of the UK and Germany.

Given that the total market capitalisation of the Russian stockmarket is only $140bn, the shrewd investor will want to participate in that outstanding growth opportunity now is certainly the time to be investing in the Russian economy.

Outside of Russia, my key stock pick for 2006 would be UK support-services company Amec (AMEC). The firm has changed considerably over the last ten years. Since the mid-1990s, its strategy has been to transform itself from a UK construction firm into a global service-driven company, something it has done with some success.

Following a review of its operations, it has recently announced that it will sell Amec Spie its European engineering and technical services division raising significant cash and split its remaining business into two. These remaining units will focus on energy and UK infrastructure.

We see this as a positive development, as it furthers Amec's strategy, strengthens its balance sheet and allows it to focus on the high-growth areas of its business.

Amec also has a group of divisions that operate in a number of interesting end markets. It has a large oil and gas division, which counts for a third of profits, and is a good play on higher oil and gas capital expenditure. It provides services for exploration and production of oil in hostile environments, such as deep water or sands, and its design and engineer services division is also of interest.

Indeed, the firm has been aligning itself very well in the nuclear side of the business, which we feel has great potential that could be unlocked later this year when the UK government announces its plans on how it will deal with nuclear waste.

There may also be some surprises on the way: Amec was recently appointed project management contractor for the development of a new £1.5bn coal to chemical production complex in China, for example, and the company expects to see further growth in this area. The Olympics, too, could be a significant driver for the stock, as the games could well see Amec netting a £1.1bn contract.