Better times ahead for oil investors?

Furthermore the headwinds facing oil and gas companies remain strong. The market is still experiencing an oversupply of oil of around 2m barrels a day, fuelled by new shale technologies. In the meantime, the amount of debt oil companies took on during the boom years is now a serious cause for concern.

With all this bad news, many investors have decided to give the major oil companies a wide berth. But others feel that the bearishness has been overdone and value opportunities exist within the sector.

Michelle McGrade, chief investment officer at TD Direct Investing, thinks contrarian-minded investors can capitalise on a potential increase in the oil price by purchasing commodity exposed funds.

She says: "The way I see it is a bubble has burst in the oil market. Oil went up to almost $150 a barrel [in 2008], then it came crashing down to $27, and while it was falling it was kind of obvious when you looked at the long-term trend that $150 was just too much.

"Now we're back to a trend line of sorts and yes the oil price will go up."

But she adds that investors need to assess which companies they think will emerge from the oil slump leaner and stronger, and accepts that "bottom fishing" in this way is a risky strategy.

"Some of these companies, I think, have seen the worst and it's just a matter of bottom fishing or trying to pick out the ones you think will survive. A lot of them have got to cost cut.

"I think the shares will come into their own when oil gets to around $60 a barrel because that's universally accepted as the break-even rate, and then at that point we will definitely see the winners and the losers, and probably another spurt in share prices."

Russ Mould, investment director at AJ Bell, also thinks that buying equities in oil companies or oil-focused funds could be a smart move right now. He says that the best time to go stock picking is when headlines about a sector are extremely negative.

He also has hopes that a forthcoming meeting of Opec on 17 April could lead to a freeze in oil production and help push prices up.

"Looking at the Opec numbers, what we have is a supply problem," he says. "The imbalance is between 1bn or 2bn barrels a day which isn't massive and wouldn't take much to be bridged.

"Equally, knowing what the stuff costs to get out of the ground, in the long run, even $40 oil doesn't feel like a sustainable or sensible number for the industry. So you would expect at one time for oil to start to go up: the question is when?"

Mr Mould adds that whether to go under or overweight the energy sector is a tricky call for fund managers to make.

One manager who has decided to go overweight oil companies is Michael Hulme, who runs Carmignac Portfolio Commodities Fund (LU0992629401).

He has been adding oil-related stocks to the fund's portfolio, prioritising businesses with strong management, a proven ability to generate positive returns through the whole cycle and which are not excessively leveraged.

He believes oil sands producers, such as Suncor Energy (SU:TOR), that have stable production and low maintenance capital expenditure (capex) are a good bet. And he likes diversified oil services companies with strong proven management and a technological edge, such as Schlumberger (US:SLB) and Halliburton (US:HAL). The fund also holds Exxon Mobil (US:XOM) and Royal Dutch Shell (RDSB).

In a recent market outlook statement Mr Hulme said: "After the difficulties of the past 12 months for the energy sector, we believe that the supply reduction from US shale names will be sufficient enough to push oil upwards in 2016.

"We consequently believe we will see a noteworthy rebound in oil prices as we progress through the year. That has given us room to gradually add to oil-related stocks meeting our investment criteria."

Mr Hulme also thinks the measures oil and gas companies have taken to slash their US exploration and production capex, will lead to production declines this year from the US shale basin and a contraction of the global oil supply by 600,000 barrels a day.

He believes there is little chance of any other producer increasing their output, arguing that Saudi Arabia and Russia are close to capacity, while the suggestion that Iran could export around 500,000 barrels a day is an overestimate.

"Demand for oil is not going away any time soon," he adds. "The world needs more oil every year as its population grows, given the 80m more people per year who will consume it, irrespective of energy efficiency measures."

What are the risks?

But even if you think the laws of supply and demand make it inevitable that the oil price will rise it's not at all clear when that will be.

Sam Lees, head of research at FundExpert, describes this as the chief risk of investing in oil equities and funds at the moment.

"One obvious risk is that you don't know where the oil price is going to go," he says. "A lot of managers are banking on it going up to $60 by maybe next year or something like that, but there's obviously no guarantee. You can't predict where the price is going to go, which is why you might be in for long-term volatility."

Despite being bullish on oil generally Mr Mould agrees that guessing what the oil price is going to do is nigh on impossible.

"I don't think anyone was predicting $147 oil eight years ago and I don't think anyone was predicting $27 this year," he says. "It's a bit of a mug's game predicting how oil is going to go."

There are also many investors who feel that rather than rising anytime soon, the glut of oil available in the market means prices will remain low for a long time. They suggest this is likely to remain the case with the slowdown in the global economy, particularly in China, weakening demand for oil and resources.

There is also growing concern about the destabilising effects of the oil and gas industry's mountain of debt. Between 2006 and 2014 the sector's debts almost tripled from $1.1 trillion to $3 trillion. Ms McGrade says investors need to be aware of the risk that many oil companies may not be able manage their debts, either through renegotiation or cutting costs sufficiently, to survive.

Mr Lees agrees saying the amount of debt burdening many oil and gas companies will see some bankruptcies and a greater number of mergers.

"You can see a lot of upheaval in the industry, particularly the US, where there's a lot of debt that's been raised off the back of high prices, but now prices are a lot lower," he says. "So you could see a lot of energy companies getting into difficulties. We're seeing that already in certain areas.

"But I suppose one of the benefits is that as finance becomes more difficult to get, some of the less efficient producers are going to get squeezed out and you'll be left with some of the more efficient companies that have slimmed down and actually been proactive in restructuring their businesses in more difficult conditions. If that happens, and you can buy into funds that are investing in those companies specifically, then there could be a lot of value over the next few years. But if oil prices stay this low you're not going to see that for a while, that's the risk."

So does he believe the risk is worth taking? He says that, as always, it depends on the kind of investor you are.

"If you don't want to be involved in very risky assets then this is probably not the best thing to get into. But if you're a long-term investor and you're happy with the volatility, then there's definitely a lot of value in certain parts of the sector."

Ms McGrade agrees that oil is definitely a more risky investment area but says as long as investors devote only a small part of their portfolio to it, of between 5 and 10 per cent, it could be a risk worth taking.

To reduce the risk further she recommends choosing funds rather than holding equities directly, as funds give you exposure to a range of different companies.

Funds exposed to oil and commodities

Ms McGrade suggests Guinness Global Energy Fund (IE00B6XV0016). "This fund's managers are definitely stock pickers so the performance of their fund isn't just a function of the oil price," she says. "Over the long term their performance has been very good so we thought they're good people to pick between the good and the bad at the moment - to sort out the wheat from the chaff."

She also suggests First State Global Resources Fund (GB0033737767) for investors interested in contrarian opportunities.

Mr Lees favours Artemis Global Energy (GB00B56FW078) as a focused fund that can give investors access to the energy sector. This fund aims to achieve long-term capital growth primarily from a portfolio of companies engaged in the oil and gas sector, energy generation and transmission. It can also invest in companies seeking to develop and exploit new energy technologies, and companies that service the energy sector. Its top holdings include Exxon Mobil, Royal Dutch Shell, Pioneer Natural Resource (US:PXD), Africa Energy Corp (AFE:CVE) and Total (FP:PAR).

Mr Mould says a lot of the top performers in the UK Equity Income fund sector have low weightings in oil so face a difficult decision on to whether to jump back in or not.

"I know that Mark Barnett at Invesco Perpetual was buying BP late last year, a lot lower down than where it is now, so that's paid off nicely for him," says Mr Mould. "But it's a big call for income funds going forward. One of the few funds I could find that did have a top 10 position in both BP and Shell is Schroder UK Alpha Income (GB00BDRZNC16). Its manager Matt Hudson has BP as his single largest position and Shell at number five."

He also suggests BlackRock 100 UK Equity Tracker (GB00B7W4GQ69) as a good passive option.

"BlackRock 100 UK Equity Tracker is an open-ended investment company (Oeic) and comes with an ongoing charge of just 0.06 per cent," says Mr Mould. "BP and Shell both feature in its list of top ten holdings with a combined weight of around 12.5 per cent."

How the funds have performed

Source: Morningstar

Performance data as at *23 and 24 March 2016

**Ongoing charges relates to the platform share classes highlighted in the text rather than the older share classes featured in the table.