PowerSwitch

I was wondering if any FSA accredited fund managers read this site? The reason being, I am considering setting up a peak oil unit trust and require someone with experince to work with me on setting it up on a part-time basis.

Please PM if you are interested in discussing the proposal further.

Mark

What would a peak oil unit trust's investment objective be? What do you see as peak oil's winners and losers?

well it would be a hedge against inflationary energy prices.

So a diversified combination of the following:

Oil majors
Oil service companies
Gold
Silver
Index-linked Government bonds
uranium miners
nuclear plant companies
renewable energy stocks


Many of these areas have good storys already. Post-peak, they will do very well if you believe a inflationary depression is likely. For example, in the last oil shock in 79', gold increased in value by 300%. That was a minor disruption in the supply of oil when compared to peak oil.

I am not certain that the shares of major oil companies would prove a wise investment, though they have done well so far.

As peak oil bites, prices will rise to levels that cause hardship, even in the richer nations.
This will lead to public/political pressure for governments to "do something". At the very least there will be requirments to sell fuel at less than the market price to the "vulnerable" or the "deserving" or the "poor".
Outright nationalisation or simple confiscation is likely with no/very little compensation to "fat cat shareholders who raked in dividends while babies froze to death"

I would agree with the rest of the list.

They all have individual risks, which is why diversification is important. The majors have large booked reserves that you are buying at a very low level. The share price should do 2 things:

1) To a certain extent, it should track the price of oil (as you are buying ownership of lots of it)
2) The P/E should move out as the traditional oil cycle is over and revenue is likely to strengthen. The P/E element is where the majors are better than the service companies as many are trading at between 8 and 10 times earnings as opposed to 20 times or more.

But wouldn't the P/E ratio advantage of the oil majors take a dive if governments taxed their profits punitively or took over their assets? Aren't oil services companies safer because they are 'below the radar' politically or because their skills and expertise are still needed, even if the oil majors were to be nationalised.

mkwin wrote:Many of these areas have good storys already. Post-peak, they will do very well if you believe a inflationary depression is likely. For example, in the last oil shock in 79', gold increased in value by 300%. That was a minor disruption in the supply of oil when compared to peak oil.

But what happens if we have a deflationary recession? which I think is more likely at the moment (too many loans have been made causing lots of bubbles; now that will change and "too few" loans will be made, causing a contraction),


Peter.

I want to throw the word 'stagflation' into the mix too....

I'm working on the assumption that governments are doing and will continue to do everything in their power to avoid deflation. Inflation solves (or appears to solve) many problems for a while anyway and the economic pain it causes tends to occur a bit later down the track, beyond the myopic, ultra-short termist horizon of the political classes.

In practice, it may not be one or the other, we may have inflation, followed by a brief period of deflation, then more inflation. I think overall the inflationary periods will win out though.

SunnyJim wrote:I want to throw the word 'stagflation' into the mix too....

That is the correct term for the environment the fund seeks to hedge against.

If there is a severe recession and deflation, obviously the mix would change but initially the precious metals would do badly. Energy will be inflationary whatever happens and the bonds will perform very well in deflation as the relative value of the payments and capital value increases in relative terms.

I predict core areas of the economy will be highly inflationary, while non-core, such as tourism and luxury goods, will be deflationary. So while prices of plasma screen TV?s may be falling, food, energy and transportation costs will be increasing. I would bet the CPI/RPI is most likely still positive, but who knows.

It is a very difficult environment to maintain or increase wealth and that?s why the investment portfolio has to be geared to the unique situation of peak oil. This is where all mainstream funds fall down as they rely on unrealistic assumptions about future growth potential.

Blue Peter wrote: But what happens if we have a deflationary recession? which I think is more likely at the moment (too many loans have been made causing lots of bubbles; now that will change and "too few" loans will be made, causing a contraction),
Peter.

That a good point, the money supply could contract, which would be deflationary. However, governments will be running large deficits, which will be causing debasement, to a certain extent, counteracting this deflationary element.

mkwin wrote:2) The P/E should move out as the traditional oil cycle is over and revenue is likely to strengthen. The P/E element is where the majors are better than the service companies as many are trading at between 8 and 10 times earnings as opposed to 20 times or more.

PEs vary by sector. Tech stocks might trade at around 20x forward PER but machinery stocks might tend to be around 12x. You will find that the PE range for a given sector is fairly constant although there might also be a cyclical element. Nobody switches out of tech into machinery just because the PE in one is lower than in the other. Think about it - if this were the case 99% of the money in the market would be concentrated in the stocks with the lowest PEs and no other stocks would attract attention. Investors usually value stocks in the context of their industry and occasionally in the context of their global peers. They do not usually compare apples to oranges by comparing PEs in one sector with those in another, completely different sector.

Suss

'services' refers to oil service companies like Schulberger so its not really comparing apple and oranges and, as I am sure you are aware, the P/E ratio for oil majors is often far higher at earlier stages of the cycle. Like you say, oil has been a very cyclical market in the pre-peak world.

mkwin wrote:'services' refers to oil service companies like Schulberger so its not really comparing apple and oranges and, as I am sure you are aware, the P/E ratio for oil majors is often far higher at earlier stages of the cycle. Like you say, oil has been a very cyclical market in the pre-peak world.

I don't cover oil stocks but you should find that the oil service companies also have a PE cycle, perhaps coincident with the oil majors. Either way, I don't see the market decoupling these to such an extent that the PEs of one collapse or soar while those of the other remain unaffected.

However, I think you're on to something re the renewables and I would also be interested in oil exploration plays. That is where investors' eyes will likely turn when oil shortages become evident...

Suss

Susukino wrote:I don't cover oil stocks but you should find that the oil service companies also have a PE cycle, perhaps coincident with the oil majors. Either way, I don't see the market decoupling these to such an extent that the PEs of one collapse or soar while those of the other remain unaffected.

Suss

The majors are far more correlated with the cycle than the service companies, that is why one of the major reasons they are trading of such low P/E ratios, relative to the service companies, at the moment.