Investment company managers on the outlook for oil and gas

“Russian supply will continue to decline under almost any scenario”.

oil rig

With no end in sight to the war in Ukraine and the price of oil still around $100 a barrel, the Association of Investment Companies (AIC) has gathered views from investment company managers with exposure to oil and gas to review the outlook for the sector.

Managers’ comments, which follow below, also cover the role of ESG considerations when investing in fossil fuel companies.

Investment companies with more than 10% of their portfolio invested in oil and gas

Investment company

AIC sector

Oil and gas exposure as % of portfolio

BlackRock Energy and Resources Income

Commodities & Natural Resources


CQS Natural Resources Growth & Income

Commodities & Natural Resources


Scottish Investment Trust



Temple Bar

UK Equity Income


Merchants Trust

UK Equity Income


Miton UK MicroCap

UK Smaller Companies


abrdn Equity Income Trust

UK Equity Income


Henderson Opportunities

UK All Companies


Fidelity Special Values

UK All Companies



UK Equity Income


Source: AIC/Morningstar (26/04/22). Includes exposure to oil and gas drilling, exploration and production, equipment and services, integrated operations, transportation and storage, and refining and marketing. Excludes JPMorgan Russian Securities.

What’s your outlook for the oil and gas sector?

Rob Crayfourd, Joint Portfolio Manager of CQS Natural Resources Growth and Income, said: “The outlook is very positive. From a simple supply-demand perspective the market looks like it will remain tight for an extended period, meaning pricing should remain elevated. Energy stocks are trading at attractive multiples and with free cash flow, paying big dividends and buying back stock, whilst years of underinvestment have left few sources of supply growth for both oil and gas, as demand continues to recover post-COVID.

“Taking oil first, US shale is the only real source of any quicker production growth, but even that is at least 12 months away given rig and labour shortages. Offshore production will take much longer. OPEC itself now has limited spare capacity as highlighted by the fact they aren’t producing to their stated quota, whilst Saudi Arabia, the only one with real spare capacity, isn’t inclined to bail out the West as they push forward on a possible deal with their sworn enemy Iran. Then Russia, who before the war produced more oil than Saudi Arabia, is seeing global sanctions, so even if India and China continue to import Russian oil it won’t completely offset it – whilst sanctions are also limiting the US technological expertise in Russia and the general availability of parts. So Russian supply will continue to decline under almost any scenario.

“Gas is similar but has more regionalised markets, with Europe clearly the most exposed to Russian supply risks.”

Simon Gergel, Manager of Merchants Trust, said: “The importance of the oil and gas sector has been brought into focus by the Ukraine crisis. Previously, the discussion in the energy sector centred around meeting net zero targets, but this year people have started to realise that we need to think about energy security.

“Reducing carbon emissions must remain a priority, but it’s also about ensuring we have a resilient supply of energy, and that means a diversity of supply. Renewables, nuclear power and biomass should make up a significant portion of our energy supply, but clearly in the context of decreasing global energy security, so should fossil fuels and natural gas.

“The distribution network of our energy supply, the grid and the storage of gas, is also fundamentally important. We must consider that it’s the major energy companies of the oil and gas sector that provide the infrastructure and expertise to support this network.”

What impact do you think war in Ukraine will have in the medium to longer term?

Rob Crayfourd, Joint Portfolio Manager of CQS Natural Resources Growth and Income, said: “Oil and gas prices were elevated before the war, as tightening fundamentals had driven prices higher. Despite what global politicians will say, this was mainly due to poor energy policy globally, which has then been exacerbated by the fallout of Russia/Ukraine. The reality is that the weak position Europe had put itself in due to energy security, was a likely contributor to Putin’s timing on Ukraine.

“Longer-term the West will look to diversify away from Russia as a source of fossil fuel supply, as highlighted by the EU coal ban, and even the biggest energy sanction resistor Germany stating it will stop buying Russian oil by the end of 2022. Russia is likely to find itself as a pariah state in some form, comparable with Iran.

“This sidelining of one of the major global suppliers of fossil fuels will curtail supply growth at a minimum, but more likely lead to production declines. This means we will need to see more investment from non-OPEC producers and greater political support in the West. The current calls for windfall taxes on these producers are hugely detrimental for encouraging the new capital investment to deliver the supply required.”

Martin Turner, Manager of Miton UK MicroCap Trust, said: “Over the medium to longer term, we expect a permanent change in attitudes to sourcing energy of all kinds, including accelerated investment in renewables as a long-term solution and a pragmatic approach to domestic and international conventional energy resources.”

What is your company’s approach to ESG, in particular environmental considerations?

Gervais Williams, Manager of Miton UK MicroCap Trust, said: “We have exposure to the energy sector and renewables as part of a diversified portfolio recognising the urgent need for ongoing investment in the energy transition. We look to minimise carbon intensity where possible and differentiate between companies as a result. Companies such as Kistos and IOG are making a valuable contribution to UK energy security by investing in domestically produced gas with low carbon intensity, for example by using remotely operated infrastructure and wind turbines to power operations.”

Simon Gergel, Manager of Merchants Trust, said: “Consideration of ESG risks is fully integrated into our investment process. For oil and gas in particular, while many call for divestment, we think that those companies selling off problematic assets achieves nothing. The assets would simply fall into private hands, where there is less scrutiny over their impact. The big energy companies are crucial to the energy transition in our view, as you need big companies to support it. Ultimately the existing oil majors have the assets and skills needed to take carbon out of the economy at scale.”

Rob Crayfourd, Joint Portfolio Manager of CQS Natural Resources Growth and Income, said: “Environmental practices of our companies have been an increasing focus for a couple of decades, primarily due to being critical in them maintaining their licence to operate and achieve licences. This means by good environmental processes, they retain local support and also that of the government within the country they operate. They are often critical to social programmes, especially in emerging markets, where they often pay a sizeable component of a country’s tax revenues, supporting basic domestic services such as health care and education.

“I would add, whilst being vilified as fossil fuel, gas has been the largest contributor to reducing carbon emissions, with coal-to-gas switching since 2010 having saved 500 million tons of CO2 emissions. That’s the equivalent of 200 million electric vehicles running on zero carbon electricity over that period. This is why the EU approved gas within their green taxonomy.”


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  1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 360 members and the industry has total assets of approximately £268 billion.
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