Are unloved EM oil producers the best way to play crude recovery?

Oil producing companies within emerging markets have yet to benefit fully from the recovery seen in the price of crude, providing investors with a stand-out opportunity within the wider emerging markets universe, RWC Partners’ John Malloy has said.
The price of crude has surged by 20%[1] in the last year, with Brent crude now trading near a three-year high in a range between $60-$80 a barrel.
Malloy said the supportive global backdrop, combined with a lack of re-pricing thus far for oil producers, meant companies with exposure to emerging markets continued to look very attractive.
“The recent rise in commodity prices is starting to be supportive for producers, providing opportunities via companies which are still unloved following the sharp decline in prices in late 2015,” Malloy, manager of the RWC Global Emerging Markets fund, said.
“It means regions like the Middle East, which is heavily exposed to the oil price, and other producer nations, look more attractive.”
Among the stocks that are still at bargain prices are Brazilian-based Petrobras and Tullow Oil, the UK-listed exploration and production company which focuses on assets in South America and Africa.
“Companies such as Petrobras have not re-priced to reflect the higher oil price environment, and while they have shown signs of recovery, this story has a long way to play out,” Malloy said.
The risk to oil producers remains a potential decline in the price of oil, with the threat from US shale very much in the minds of investors.
However, Malloy – whose fund returned 44% last year versus the MSCI EM Index return of 37%[2] – said the global growth outlook, and its corresponding impact on commodity prices, had become much more encouraging.
“On the demand side, the story for oil remains supportive, with global growth strong and improving, China importing more oil, and demand from emerging markets themselves for oil also solid,” he said.
“The supply side has been the challenge, but with both OPEC and non-OPEC members working together to limit supply, and US shale production actually coming in lower than expected, the current price range could prevail for some time.”
[1] According to Bloomberg, generic CO1 futures, Brent crude moved from $55.90 on 03/03/17 to $67.50 by 26/02/18.
[2] According to data from RWC Partners and MSCI, the RWC Global Emerging Markets fund return (class B USD) returned 43.95% in 2017, versus the MSCI EM index (USD) return of 37.28%.