Lacey & Waghorn: UK energy stocks have 95% upside

Investec’s Mark Lacey and Jonathan Waghorn have said energy equities in the E&P sector are showing “extreme value” as shares discount M&A prospects and price in a global recession.

The pair, managers of the Investec Global Energy fund, said energy equities are now discounting "recession-based" underlying crude prices of around $60 a barrel, 45% below current oil prices.

That represents "the widest discount to spot and forward curve prices we have seen for the last few years", according to Lacey. Forward curves of WTI and Brent crude are pricing in $92 a barrel and $98 a barrel respectively until 2016.

Lacey and Waghorn see these valuations against a backdrop of extremely tight supply/demand and the likelihood of companies using strong balance sheets to acquire assets.

The managers see an average upside of around 95% in the UK exploration and production sector, based on their valuations and a long term oil price assumption of $100 a barrel, share prices in the sector having fallen by 35%-70% in the last five months.

That same methodology also indicates an 80% upside for the US E&P sector and an 85% upside for Canadian oil sands companies, said the managers.

The Global Energy fund returned 6.4% over the year to 5 August, versus an IMA Specialist sector average of 2.3%.

Elsewhere, the duo also see opportunities within integrated oil and gas mega caps.

"Some of these integrated equities are now trading below the level at which they traded in March 2009 when oil prices touched $35 per barrel," said Lacey.

"In Europe in particular, the integrated companies have been extremely weak, with AA rated companies now paying dividend yields of between 7 to 8%.

"In addition, integrated companies in Europe, US, Canada, Brazil and China are now trading below their proven reserves values - this is very rare in this sector given the large resource base of these companies."

He added global consumption will continue to be driven by emerging markets, meaning below-trend OECD area GDP growth will not necessarily weaken global oil demand growth.

"We believe China could well be the largest consumer of crude oil by 2022 based on crude consumption growth of around 7% on average per annum", Lacey predicted.