European oil shares, having been for so long the dividend darlings of income funds, are losing their pulling power as investors take another look at the long term future of energy companies focused on fossil fuels. A proposal by the world's largest $1 trillion sovereign wealth fund to ditch its oil and gas shares because of the volatile oil price, has highlighted the risks of being exposed to a sector which analysts say is in long term decline.
Investors are pulling money out of exchange traded funds (ETFs) tracking global oil and gas stocks. Net assets in oil and gas ETFs fell to their lowest in a year in November, to $21.9 billion, from a high of $24.4 billion in March, ETFGI data showed. "In the long run, we have to reassess the oil and gas sector as an ex-growth or a sector going into decline," said Simon Webber, lead portfolio manager on the global and international equities team at Schroders, who said he was underweight in the sector.
A combination of factors has put a question mark over the oil sector's desirability as an investment, chiefly environmental considerations and ambitions for a world powered by electric vehicles. While the price of Brent crude has rallied this year to over $60 a barrel, from $27 in January 2016, the European oil & gas sector has been a notable laggard.
The sector is down 3.5 percent in 2017 against a 6.5 percent gain for the pan-European STOXX 600 index. That compares with a near-23 percent gain for oil shares in 2016. Oil stocks are however, still popular for the income they generate through dividend payouts. Of the companies in the FTSE 100, BP and Royal Dutch Shell feature in the top 10 in terms of dividend yield.
Currently the FTSE 100 yields 3.8 percent, while the STOXX 600 yields 3.2 percent. By comparison, Shell and BP yield around 6 percent, while the highest yielding stock in the European tech sector is Nokia at 4.2 percent. Shell recently announced it would return to paying cash dividends rather than dividends in shares, and would step up its investment in new energy which focuses on renewables.
Bank of America Merrill Lynch's November European fund manager survey showed that oil was still the most popular sector. Though fund managers are beginning to rethink their oil exposure, they say the shift will be slow. Gary Paulin, head of institutional brokerage, EMEA and APAC at Northern Trust Capital Markets, expects another big spike in oil prices in the next two or three years.
"That will be the last hurrah, however, and then it will be the greatest short for the next 20 years," Paulin said. Fund managers said they are diversifying their portfolios and looking to a future of electric vehicles.
Richard Robinson, manager of the Ashburton Global Energy Fund, has been buying battery makers in order to benefit from the demand for electric vehicles - even though he expects oil prices will continue to rise. Robinson has bought into Albemarle, Nemaska Lithium , Umicore and Clean Teq. He has increased exposure to these lithium and cobalt companies, now accounting for up to 7.6 percent of his portfolio.
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