The consolidation of the oil industry along with increasing demand from China is likely to see the oil price rebound, generating strong returns for investors in the process, according to one international asset manager.
Speaking to SMSF Adviser, Fidelity investment director Alva Devoy said the current oil price is unsustainable with the majority of oil projects non-viable or profitable at this level.
Consequently there have been numerous oil projects cancelled in the past 18 months, and increasing defaults and bankruptcies within the industry.
“Companies with stronger balance sheets have been able to buy assets from these companies going into default, which means we are getting a consolidation in what is currently quite a fragmented market in the US,” said Ms Devoy.
This consolidation, she said, along with the increasing requirements for oil from China, is improving the supply/demand balance for oil, and will see the “oil market tighten significantly in 2016”.
“We’re currently looking at energy companies with very strong balance sheets, that are not wholly debt-financed, that have good assets and are low-cost producers,” she said.
Gem Capital adviser Mark Draper said oil is likely to be a strong investment theme in the next few years, but added that SMSF trustees need to be aware that oil is an investment that must be closely monitored.
“Like any commodity play, there is a point where you buy and a definite point where you sell. Oil is not a set-and-forget investment at all,” he warned.
He also said SMSF trustees should be cautious not “to get sucked in by the yield” and look for other aspects instead when looking at companies or funds.
“I think this is particularly relevant given you’ve just seen massive reductions in the yield of all of the majors in Australia,” he said.
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