A 50 per cent fall in oil prices since last year has produced a “shake-out” in the oil and related industries in the region and elsewhere, even as it sees lower fund flows from the regional sovereign wealth funds this year and the next, a top official at hedge fund Pacific Alternative Asset Management Company (PAAMCO) told Gulf News.
“The active managers may be interested in looking at oil and oil related investments as oil prices have fallen and some of the stocks and credit instruments in those sectors are at prices lower than they were last year,” said Stephen Oxley, managing director at PAAMCO.
The latest in the shake-out has been from Royal Dutch Shell, which took over BG Group in a $91 billion (Dh334 billion) deal.
“There would be more consolidation in the industry. You may see companies getting taken over and see mothballing of assets in cases where getting oil and gas from underground is expensive and higher than the cost of production,” Oxley said.
“As much capital spending has already happened in Canada or for fracking in North America. So companies valuations have changed but that does not necessarily mean that the companies do not have a viable business model to lower oil prices, but some may be less viable. It is important to look at each case carefully” he said.
Investors may be looking at opportunities after a radical change in companies valuations and active investors may look at each case and see both on the traditional and alternative energy side.
Drawdown
PAAMCO, which has about more than $9.5 billion assets under management, also manages money for some of the sovereign wealth funds in the region, which derives most of its revenues from oil and the top official sees a drawdown on investments from them.
“Governments may want to use some of the assets flowing into sovereign wealth fund to support infrastructure and other spending in the country and the region,” Oxley said.
There is an expectation that oil prices may stabilise and the long term range could be $50-100 a barrel. He also expects a recovery in demand even as the existence of small and marginal producers could be under threat.
More interest in alternatives
“There are more interest now in alternative investment strategies because of the hedging properties and because of the risk that people see in traditional equity and fixed income markets,” Oxley said, adding “risk aversion is something that is there, although most of the investors are long term players and they can manage volatility.”
“There are also concerns about potential volatility in the equity markets. There is real attractiveness in investing in hedge funds which can be expected to manage future volatility, and they have lower co-relation with long only equities and produce a return with some kind of downside protection,” he said
