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An offshore option for energy bulls

Simon Brown unpacks an ETF in the US energy space.

MARC ASHTON: Welcome to the Moneyweb Offshore Investing podcast, today I’m joined in studio by Simon Brown. Simon, thanks for joining us

SIMON BROWN: Thanks, Marc, my pleasure.

MARC ASHTON: Forget gold, forget platinum, forget silver, there is only one commodity anybody is talking about right now and that’s oil. Earlier this week we had OPEC talking about US$200/barrel, we’ve had speculators saying $20/barrel, where are you on the commodity?

SIMON BROWN: Sorry, Marc, I’m the boring oke, I’m the $60 to $70/barrel oke, at that point it just feels about right, oil over $100 didn’t make a heck of a lot of sense, as a Sasol shareholder I liked it but it didn’t make a lot of sense. Oil at $30, $40, even $50 I can see it being there and I can see it being there for the rest of the year maybe but longer-term out oil has got to be $60 or $70 and maybe longer out than that ultimately north of $100.

MARC ASHTON: This leads to a really interesting dynamic, if you look at the trading market and I try my hand at a little bit of day trading commodities, not particularly well, but let’s just say I get out there and I try, markets in and around oil trading have been incredibly volatile. We’ve seen yesterday 5% up, 7% down, we lost 10%, we made 14% in the last three days but lost 50% over the last year. It’s a really, really volatile market, now we say well, how is that going to impact the likes of your Chevrons, your Texacos, etc, is there a way to be able to go and participate in those big oil players without trying to take a bet on the individual commodity.

SIMON BROWN: There absolutely is and that’s what we hunted out is a BlackRock ETF, it tracks the US energy space, it’s the US Energy Exchange Traded Fund. So what do we mean by US energy, those are companies that produce and distribute oil and gas. Produce, those are the ones with the holes in the ground, who are currently having a bit of a tough time because they’re shuttering their shale gas and the like. But the interesting part here is also the distribute part, these are the folks who own the pipelines, now what we get there is the price of the oil is irrelevant to the person who is distributing it, there might be a little bit less coming out but in truth there’s demand and if anything the demand from the end user is going up because the gas prices, petrol prices have come down so much.

MARC ASHTON: So is it fair to say this is not a commodity play, this is actually something which is looking at supporting infrastructure around the sector, don’t get absorbed by all the noise that you see, sharp moves up, sharp moves down but is this actually a play on the sector itself?

SIMON BROWN: It is and it does have some commodity play as well, so there is some production happening in this space but what the distribution, the bits around it are actually doing is giving you exposure to energy and I say energy because it’s oil and gas, it’s not just oil, giving you exposure to energy, which is going to fairly track the oil price but reduce volatility by having those auxiliary industries that operate around and, therefore reduce some of your risk, and take some of the reward off. Make no mistake you’re giving up some reward for it but it certainly makes that rollercoaster ride a little less stomach churning.

MARC ASHTON: Give us some ideas of what components are playing in this ETF?

SIMON BROWN: The big stock is ExxonMobil, you mentioned a moment ago, is the absolute grand-daddy there at almost 23% of it, so you mentioned a moment ago rather than the individuals. You’ve almost got, at a quarter of your holding almost, is into ExxonMobil, Chevron is the next one and then a bunch that don’t ring bells to me, Chevron is at 12%, we’ve got Schlumberger, we’ve got Kinder Morgan and smaller companies we’ve never heard of, some of them in the fracking space, they’re having a tough time, some of them managing pipelines. Those commodities are still flowing regardless of the price.

MARC ASHTON: The interesting thing you can probably look at here is when times are good for oil players they are really, really good, they’re good dividend yields and you can almost draw parallels between them and some of our platinum producers, dividend yields really come through strongly. What’s the yield that you’re getting on this ETF?

SIMON BROWN: You’re 100% right, we remember the heydays of the platinum guys and their special dividends almost worth more than the share is now. The yield is just over 2%, so a surprisingly modest yield in that space and yes, we could say the stocks have had a tough time and if we look at what’s happened to the price it’s certainly had a tough time, down a third towards the end of last year. What I think we’re seeing in many cases is a lot of it is some preemptive, certainly we’ve had some results, we’ve had some dividends coming down, I suspect there could be in the short term there could be a little more pressure on that yield though.

MARC ASHTON: Taking a look back now we’ve obviously seen oil move very, very sharply, let’s just look at that over the last ten years, tell us a bit about how this ETF has performed and have we felt sharp movements in the commodity price then impacting the ETF, give us some idea of performance.

SIMON BROWN: So if we go back ten years to February 2005 it rallied hard up until the crisis of 2008, by hard I mean it was up by about 150% over that period, basically gave that all back again. Then it rallied again, in fact over the ten-year period up to November, before the oil price collapse, it was up some 300%, it’s doubled in the ten years. It’s going to be volatile with that oil, every time oil pulls back there is going to be some selloff and what we’re doing here is in essence saying has this been under pressure? Absolutely it has. If you’re bullish on the energy sector, on the oil sector over the medium term – because short term who knows what will happen – this is certainly one of the ways to play that bullish nature.

MARC ASHTON: One thing that does occur to me though is they do have an ability to ultimately…there are a lot of questions about the viability and the sustainability of an organisation like OPEC in terms of being able to control the market but by buying into an ETF like this you’re almost able to have one of those levers that says supply, we have a supply glut, let’s just turn off the taps a little bit and then be able to manipulate the commodity price a bit. Do you think that’s a fair assessment?

SIMON BROWN: I think it is, absolutely and we see it, OPEC is not the organisation they were in the ‘70s when they set up, what we’re seeing with the fracking guys though and particularly related to fracking, they can literally don’t-come-back-to-work-tomorrow type of scenario and curtail production. We’re certainly going to see, I think 2015 oil is going to be the volatile commodity out there, make no mistake about it but at the end of the day this planet runs on oil and yes, OPEC want to drive players out and the like, etc but we’re still an oil-consuming planet.

MARC ASHTON: For the listeners out there who have missed the name of this ETF?

SIMON BROWN: So it’s an iShares US Energy ETF, the code is IYE, trades
New York and Nasdaq, and available on Webtrader.

MARC ASHTON: Excellent. Simon, thanks for joining us in the studio.

SIMON BROWN: Always a pleasure.

** This is a sponsored education series focused on offshore investing. The content is sponsored by Standard Bank Webtrader and Moneyweb are the content creator.

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