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Comment: Current undervaluation of oil companies cannot continue

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Oil companies are currently undervalued but the situation cannot continue for long, says Angelos Damaskos (pictured), CEO, Sector Investment Managers and Fund Advisor, Junior Oils Trust…

The Junior Oils Trust has been conservatively positioned since the beginning of the year with significant cash reserves and an allocation to corporate bonds. This positioning has provided some insulation against market weakness as a result of the Japanese earthquake, the Eurozone debt crisis and now, the indiscriminate sell-off of equities. The fund currently holds approximately 14% of its portfolio in corporate bonds and around 5% in cash. We have been selectively investing available cash reserves into equities since May and are finding many attractive companies with sound fundamentals are trading at extraordinarily cheap valuations.
The oil price has been weakening since its two-year high in May, with markets in free-fall in August on realisation of the size and complexity of the debt problems in developed economies. The American debate over the national debt level and the subsequent downgrade of the nation’s credit rating has also exasperated the situation. However, we believe that current share prices show a large dislocation from the price of oil, discounting long-term oil prices of around USD60/barrel. Companies are therefore undervalued, and this dislocation cannot continue for long.
While demand for energy and oil may slow, it will not fall dramatically. In China for example, demand continues to grow, albeit at a slower rate. The country’s industrialisation and urbanisation requires greater energy input and its imports of oil are still growing. In addition, the developed world has an established standard of living that demands a certain energy input – a slowing economy may mean greater care over energy usage, but any cuts will be small.

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