European oil shares, having been for so long the dividend darlings of income funds, are losing their pulling power as investors take another look at the long term future of energy companies focused on fossil fuels.
A proposal by the world’s largest $1 trillion sovereign wealth fund to ditch its oil and gas shares because of the volatile oil price, has highlighted the risks of being exposed to a sector which analysts say is in long term decline.
Investors are pulling money out of exchange traded funds (ETFs) tracking global oil and gas stocks. Net assets in oil and gas ETFs fell to their lowest in a year in November, to $21.9 billion, from a high of $24.4 billion in March, ETFGI data showed.
“In the long run, we have to reassess the oil and gas sector as an ex-growth or a sector going into decline,” said Simon Webber, lead portfolio manager on the global and international equities team at Schroders, who said he was underweight in the sector.
A combination of factors has put a question mark over the oil sector’s desirability as an investment, chiefly environmental considerations and ambitions for a world powered by electric vehicles.
While the price of Brent crude has rallied this year to over $60/barrel, from $27 in January 2016, the European oil and gas sector has been a notable laggard.
The sector is down 3.5% in 2017 against a 6.5% gain for the pan-European STOXX 600 index. That compares with a near-23% gain for oil shares in 2016.
Oil stocks are however, still popular for the income they generate through dividend payouts. Of the companies in the FTSE 100, BP and Royal Dutch Shell feature in the top 10 in terms of dividend yield.
Currently the FTSE 100 yields 3.8%, while the STOXX 600 yields 3.2%. By comparison, Shell and BP yield around 6%, while the highest yielding stock in the European tech sector is Nokia at 4.2%.
Shell recently announced it would return to paying cash dividends rather than dividends in shares, and would step up its investment in new energy which focuses on renewables.
The sharp fall in oil prices in 2014 prompted oil majors to curb investment in alternative energy technology.
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