The sector is on a 40 per cent discount to the market as a whole, he says, and is on a price-to-book level it has reached on roughly 6 occasions in the past 50 years.
With a strong dollar supportive of the oil price it is a great time to look at funds that are invested in this area, he says.
“The risk on the upside is oil supplies being disrupted in the Middle East as open conflict spreads beyond Syria, at which point the price would quickly rise to $130 [Brent crude is currently $110],” he said.
“The other possibility, given very little credence, is that a mix of new production (shale) and the world entering a deflationary tailspin, drives the price sharply lower.”
Dennehy (pictured) rates Artemis Global Energy and Investec Global Energy in the space.
Richard Troue, investment analyst at Hargreaves Lansdown also thinks valuations are attractive, but he is more cautious on the timing of any purchase, warning that there could be plenty of volatility round the corner. “This is the type of sector that suits phasing money into the market over six months or so, or a good one for a regular long-term savings plan, dripping £100 a month into your pension or ISA.”
Troue notes that the sector is better placed to benefit from an economic recovery than the miners, which have also suffered over the past year.
Performance of indices over 1yr
Source: FE Analytics
“I think they don’t have quite the same production issues as mining companies,” he said. “They have not had some of the management issues as well, as some of the mining companies have.”
“There needed to be a lot of change at a lot of the mining companies – a complete change of attitude. But with energy companies it’s [poor performance] more sentiment-driven, so there are plenty of good businesses out there.”
The sector is likely to benefit from a recovery in the US that now seems under way, although Troue notes that there could be plenty of volatility in the markets over the next few years as the country withdraws from its QE programme.
The unknown factor is the effect of the ongoing slowdown in the emerging markets on the sector. Troue says that the sector is likely to be less hard hit than the miners, although it is a reason to be cautious about investing everything right away.
He also rates the £95.2m Artemis Global Energy fund in the sector.
“It’s managed by two pretty experienced managers,” he said. “John Dodd has managed energy stocks for a long time and for a long time he wanted to manage a specialist energy fund.”
“His co-manager Richard Hulf is a geologist and a petroleum engineer, so Richard can analyse companies in terms of their production potential and John can look at other aspects like stock selection and portfolio construction.”
“We like the unconstrained nature of the fund as well.”
Troue explains that the fund can buy companies involved in different parts of the exploration and production cycles and can invest all over the globe.
It also has some unquoted, private equities, which increases the risk on the fund and helps explain the fund’s recent underperformance.
Launched in April 2011, the fund has lost 15.94 per cent as the MSCI ACWI Energy index has lost just 3.74 per cent, according to data from FE Analytics.
Performance of fund versus index since April 2011
Source: FE Analytics
Troue says that the unquoted companies have weighed on the portfolio as a whole, as the managers have had to write down their value.
“There were a couple of companies that they were hoping would be floated but they have been disappointed and they have had to write them down,” he said.
He explains that this unquoted element makes the portfolio much riskier, and any investor should bear this in mind.
However, Dodd has a long track record of investing in such companies on the Artemis Alpha investment trust, which was covered in a recent FE Trustnet article.
Unquoted companies can make up a maximum of 10 per cent of the fund, although this number is currently lower.
The fund is looking at new ways to add alpha as well, he notes.
“They have been increasing their exposure to shale gas in the US and looking for oil producers in some of the remaining untapped basins in Africa and Asia.”
Investors who are worried about the unquoted element of the portfolio could feel safer with Investec Global Energy, Dennehy’s second choice.
This fund has a much longer track record, and has outperformed over the longer term, making 140.49 per cent since November 2004, more than the 124.42 per cent of the MSCI ACWI Energy benchmark.
The £146m portfolio has underperformed in recent years however, making just 12.16 per cent compared to the index’ 29.12 per cent.
Performance of fund versus index over 3yrs
Source: FE Analytics
The fund is under new management however, with Tom Nelson and Charles Whall taking over in February of this year.
Both funds have a minimum initial investment of £1,000. The Artemis fund has ongoing charges of 1.63 per cent and the Investec fund 1.62 per cent.