The price of Brent crude has fallen by almost 60 per cent since June 2014, according to data from FE Analytics, with both Royal Dutch Shell and BP taking double-digit losses in their share prices over this period. BP is down 19.21 per cent while Royal Dutch Shell has shed 10.8 per cent.
Performance of stocks vs index in 2014
Source: FE Analytics
Such stocks are among the most popular to be held in the UK equity income space due their perception – and track history - for regularity and stability in paying consistent and growing dividends, a feature that many investors, both directly and indirectly, rely upon.
For example just before the oil price fall FE Trustnet revealed that more than 90 per cent of UK equity income funds had one of the stocks as a top holding.
Cholwill (pictured), who has been the manager of the £1.6bn Royal London UK Equity Income fund since 2005, is upbeat that while low-priced oil will prove beneficial to the overall UK economy, it should also not significantly hurt oil majors and not result in the cutting of their dividends.
He says while the spot oil price has had a very sharp fall, the five-year forward contract price has held up much better.
“If you go back a few years you see that the five-year forward contract price has been a lot lower than the spot price and so I think there is scope in due course for it to bounce back to current levels,” he explained.
“If you look back at any analysis of marginal supply and producing oil to get an economic return, certainly current demand cannot be met at the current spot price of $45.”
“One thing that is not factored into forecasts is the effect of low oil price on developed economies, which are big consumers of oil. There is a real benefit to these economies that has not been seen yet.”
Cholwill says his fund has done well from its oil stocks – both BP and Shell are top 10 holdings and collectively make up 7.5 per cent of the fund.
“One of the benefits of the big oil companies is that they see survivor bias because they are financially very strong. There is a lot of scope for them to postpone capital investment and to squeeze the oil service companies,” the manager said.
“The majors are very minded to avoid dividend cuts and if you look at the Shell balance sheet, it could take gearing a lot higher before it is anything like an issue. Clearly, in a world of cheap borrowing companies like Shell - who are very credit worthy - can borrow money very cheaply and so the cost of borrowing long-term money on is very much less than the yield on their shares.”
“So I’m very happy to hold them because they can offset the pressure in the market and wait for it to normalise.”
However, he says it is a different story for the oil explorers: “It is far too soon to look at BG, for example.”
Eric Chaney and Manolis Davradakis, investment strategists at AXA IM, disagree with Cholwill.
They said: “Crude oil at $50 is a game changer for the global economy. The price of oil is likely to remain low for several years, with Saudi Arabia having clearly shown that it will defend its market share, not prices.”
The Royal London UK Equity Income fund has been the second best performing portfolio in the IA UK Equity Income sector since Cholwill took over with returns of 153.62 per cent, beating its FTSE All Share by more than 50 percentage points.
Performance of fund, sector and index since 2005
Source: FE Analytics
The fund also boasts top decile returns over one, three, five and seven years, as it has beaten the sector in every year since Cholwill has been in charge. It currently yields 3.54 per cent, has performed well in terms of its income and has increased its income pay out in four of the last five years.
Also the fund gets the nod, as part of our income campaign, as it is one of the few in the sector which publishes its dividend history on its factsheet.
It has an ongoing charges figure of 0.67 per cent.