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The Sunday Times: Five ways to cash in on the surging oil price

July 22, 2007

By David Budworth and Clare Francis

The high oil price is not only good news for the big exploration companies – silicon producers and coal miners could also benefit.

OIL has been one of the big investment surprises of 2007. At the start of the year, analysts thought it would fall back, but this month an international energy watchdog warned that a supply crunch could send prices soaring to record levels.

The price of crude has already leapt 25% since January, when it briefly dipped below $50 a barrel after mild weather in America and Europe convinced investors that demand would fall. That view was wide of the mark and the Paris-based International Energy Agency predicts a severe shortage over the next five years as China, India and other fast-developing countries consume more, while oil-producing nations supply less.

The oil price hit $78.40 a barrel on the London market last week, not far off the peak of $78.64 a year ago after conflict broke out in Lebanon. Investment bank Goldman Sachs suggests it could rise as high as a record $95.

Even oil-price bears think it could surge to record levels if the hurricane season in the Atlantic, or political problems in West Africa and the Middle East, disrupt supply.

Eric Chaney at Morgan Stanley, an investment bank, said: “Seven to ten hurricanes are expected in the Atlantic, of which three to five are expected to be worse than normal. A supply-side disruption, caused for instance by an embargo against Iran, would send prices higher.”

Increased oil prices will be bad news for businesses and consumers – the AA warned last week that petrol, which now averages about 97p a litre, could breach £1 within weeks – but they are good news for investors. We ask the experts for some tips.

1 Buy the giants

“They may seem dull but the large oil and gas companies such as BP and Shell are where the biggest opportunities exist,” said Tim Guinness, manager of the Investec Global Energy fund.

BP has had a bad year: shares slumped 5% to 599½p as the company has been beset by bad news. But a change in management and the pickup in oil prices means fund managers are tipping the oil giant. In 2003 its shares traded on a price/earnings ratio of 19 and paid a first-quarter dividend of 3.45p. Now they are on a p/e of 11 and it paid a dividend of 5.15p, giving a yield of 3.5%.

Analysts also recommend Shell and Total.

2 Bag a takeover target

Smaller exploration and production firms are also tipped, partly because they could become the subject of bid speculation, which is usually good news for investors in the target firm. Colin McLean at SVM Asset Management said: “As the oil price goes up, the industry giants are going to want to add to their reserves. The easiest way is to buy small companies that are already doing the job.”

McLean’s potential takeover targets include Tullow Oil, an oil and gas exploration and production company that operates in the North Sea, Africa and India. He also suggests Venture Production, which focuses on the North Sea.

Graham Neale at Killik, a stockbroker, likes Premier Oil, which has already been the subject of takeover rumours and received a bid approach last year which fell through.

He said: “Even if it isn’t a target it is a cash-generative business with a geographically diverse portfolio and looks good value.”

If you would prefer to invest in a fund that focuses on the smaller end of the market, Mark Dampier at Hargreaves Lansdown, a financial adviser, backs the Junior Oils trust. The biggest holding in its portfolio is Dragon Oil, an exploration company focused on Turkmenistan.

3 Plug into silicon

Alternative energies such as solar and wind power will become big business if the oil price remains at its current high levels.

However, solar power is severely hampered by a shortage of its raw material – silicon. It has been used for years in micro-chips, but is also a key material in photo-voltaic cells.

Analysts therefore say that silicon manufacturers, rather than solar-panel firms themselves, will be the main beneficiaries of the alternative-energy boom.

Hemlock Semiconductor, the biggest silicon supplier in the world, is listed on the US stock market, while German group Wacker Chemie is the second biggest.

4 Go nuclear

Nuclear power could also make a comeback. It already provides 20% of Britain’s electricity, and Labour has indicated it is prepared to build more plants.

There are 30 reactors under construction around the world and China is talking about building another two a year for 15 years. Even Russia says it wants a quarter of its energy needs to be met by nuclear power by 2025.

The obvious way to capitalise on this surge in reactor construction is to invest in uranium, the raw material needed to produce nuclear power.

Uranium Participation, a Canadian fund that is listed on the Toronto Stock Exchange, buys uranium to benefit from price increases.

Analysts said the high oil price could even lead to a revival of Britain’s coal industry. The main beneficiaries would be mining groups with coal divisions such as BHP Billiton, Anglo American and Rio Tinto, all listed in London.

5 Gain from others’ pain

The surge in oil prices means that some firms are hurting. Big petrol consumers such as airlines are particularly vulnerable. To survive in an era of higher oil prices they will have to become more efficient by upgrading their aircraft.

That’s good news for Rolls-Royce, the aircraft engine manufacturer, according to David Marchant, global fund manager at Insight Investments, part of the Halifax group.

WHAT TO BUY – AND AVOID

Winners (Stock and price)

BP – 599.5p

Tullow Oil – 512p

Premier Oil – 1154p

Venture Production – 817p

Wacker Chemie – €180.2

Losers

Arriva – 812p

National Express – 1168p

British Airways – 420p

First Group – 666.5p

Easyjet – 488.75p

http://business.timesonline.co.uk/tol/business/money/consumer_affairs/article2115831.ece

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