Gary McAleese, manager of the Ignis Balanced Growth fund, is among those in the industry suggesting recent deals made between Iraq and oil giants Shell and BP could prove to be a profitable lower risk way for investors to gain from Iraq’s resurgence as a source of oil.

Performance of funds over 1-yr



Source: Financial Express Analytics

The deals give the two UK firms and other global oil majors access to reserves of collectively more than 50bn barrels. To put this in context, Shell produces 3.2m barrels a day, while BP's proven reserves globally stand at about 18bn barrels.

McAleese, who has a 7.7 per cent holding in BP after taking profits recently, says the outcome is positive for the company.

"The Iraq deal is an excellent one for BP and provides an almost risk free way to gain a foothold in a country that is likely to become an increasingly important player in the global oil market," he says.

A number of other funds could also be affected by the deals; data from Financial Express Analytics suggests the JPM UK Managed Equity fund has a 9.6 per cent holding in BP, while the Allianz RCM European Equity Income fund has a 5.8 per cent holding in Shell.

The Martin Currie UK Growth fund has the largest exposure to BP with 9.9 per cent of its portfolio in the stock. Over one year to 17 February, the fund returned 26 per cent, and outperformed the MSCI World Oil, Gas and Consumable Fuels Index by over 10 per cent.

The Fidelity UK Aggressive fund has a 9.3 per cent weighting in Shell, the biggest of any IMA sectorised fund. It returned 34 per cent in the last 12 months, outperforming the MSCI World Oil, Gas and Consumable Fuels Index by over 18 per cent.

The deals signed with Iraq mean the following: Shell and ExxonMobil win rights to the West Qurna field, which has reserves of 21bn barrels; Shell and Petronas of Malaysia won the Majoon field, with 12.8bn barrels; and BP and China National Petroleum Company got the rights to Rumaila and reserves of 17.8bn barrels.

Iraq currently produces around 2.5m barrels of oil a day but hope to raise the output to more than 12m barrels of oil a day over the next six years. Iraq's main rival in the oil stakes -Saudi Arabia - currently produces over 8m barrels a day, but has an overall output capacity in excess of 12m barrels a day.

But, Iraq could overtake Saudi Arabia as the world's pre-eminent producer.

"At present Iraq produces less oil than Saudi Arabia but it is important to note that there has been very little exploration done in the country for 30 years, that is, no one really knows Iraq's full potential," McAleese says.

"With proper investment in infrastructure it is very possible that Iraqi oil production will surpass Saudi on a medium-term view," he adds.

However, despite having a large holding in BP which he says it does offer a "decent" yield, McAleese states the stock is not held solely for this reasons.
 
"We believe it to be the cheapest oil major globally that has potential for a re-rating on the back of earnings momentum generated from internal restructuring," he says.

"As noted above, the deal in Iraq has excellent medium-term potential but will not impact BP's capacity to raise the dividend in the short-term. We expect the company to continue to surprise the market positively over the next 12 months and it is preferred over its UK rival, Royal Dutch Shell," he adds.
 
Despite the outperformance, some intermediaries remain wary of the oil industry. Meera Patel, senior analyst at Hargreaves Lansdown describes the sector as having a "yo-yo affect" in recent years, with prices going up and down.

"There are all sorts of issues surrounding oil, investors need to remember the simple supply and demand story and focus on how they can make money. It's a very sensitive game and will be volatile depending on what governments do," she says.

Patel says it is important to remember that most funds with a focus on large UK equities will generally have holdings in Shell and BP and therefore recommends investors look to diversify their oil exposure.

This could include holding oil funds such as the CF Junior Oils Trust fund run by Angelos Damaskos, which represent exposure to smaller oil stocks. Holdings here include Dragon Oil, Tullow Oil and Nighthawk Energy.