In terms of supply and demand the energy sector seems to be the best one way bet in the markets. But what exactly is the best way to play it? For instance, it is likely that gas stocks will come under pressure if the US starts to export LNG, as seems increasingly likely. Oil stocks are often pretty fully priced and the gas revolution will probably constrain price increases. Uranium is problematic after Fukushima, although the long term supply demand balance still looks positive. A JP Morgan report today shows that the best way to play the energy sector for the last year at least was the regulated utilities sector, which is not just energy but has offered the most predictable form of access.
It has clearly outperfomed the market:
The Regulated Utilities enjoyed a particularly strong 2011 and have continued to outperform thus far in 2012. A number of factors contributed to this performance, both at a market level – falling ten-year yield, rising risk aversion – and at a company specific level. Figure 1 shows the performance of the Regulated Utilities Index (RUI) against an inverse of the Australian 10-year government bond over the past 12 months.
With the exception of Hastings, the regulated utilities stocks have historical dividend yields of 7-10% which looks pretty good for such predictable markets. JP Morgan is not rushing in with buy recommendations, however, sensing that capital gains may be more difficult. It is underweight or neutral on the sector. Still, with such the focus being on income, the fundamentals are of interest.
The supply of gas was the best part of the sector, JP Morgan argues:
The gas NSP group was the strongest sub-group within the RUI, with ENV (+34%) and HDF (+28%) delivering the strongest performances over the past year. At the other end of the spectrum, DUE (+5%) and SPN (+12%) underperformed the group. It’s notable, that every stock in the regulated group delivered positive absolute returns in the past 12 months – this is in stark contrast to weakness of the broader market.
A massive transformation in world gas supply is having a profound effect on the world energy equation, which is making stock picking in energy companies complex. But companies that own the pipes that supply the energy are recording a different result.