Don’t avoid the energy sector

Investors shouldn’t steer clear of the energy sector.

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That’s because “there are tremendous fixed-income opportunities available for [those] who are willing to take a bit of a longer-term view,” says Andrew Kronschnabel, a portfolio manager at Logan Circle Partners in Philadelphia. He manages the Renaissance U.S. Dollar Corporate Bond Fund.

High-grade issuers in the energy sector are generally more exposed to market risk because of their unhedged oil and gas production, he concedes. But, at the same time, they’re also lower-cost producers.

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Kronschnabel explains, “Their replacement costs are generally much lower. If you look at, for example, an issuer like ConocoPhillips—a major E&P company that operates in nearly 30 countries—its three-year finding and developing costs [are] below $24 per barrel.”

Also, over the past three months, the high-grade energy space has re-priced “pretty dramatically […] to the tune of 50bps to 60bps,” he says. So “there’s opportunity there if you can pick some of the better-quality issuers.”

Further, Kronschnabel says about 20% of the high-yield universe is exposed to the energy sector. And what investors need to understand is only a small portion of that group is affected by the daily pricing of commodities.

Read: Oil prices boosted by OPEC predictions

Consider Master Limited Partnerships, or even index products that offer exposure to these partnerships, he adds. MLPs involve investments in projects such as pipelines, which means they don’t depend on the everyday value of oil when it comes to product pricing and return on investment.

Read: How to own U.S. rental property, for an overview of Limited Partnerships

Instead, their pricing depends on contracts that have been drawn up between partners, on the capacity of pipelines and on the volume of oil produced, says Kronschnabel.

So despite volatility in the overall sector, he adds, “we’re finding plenty of opportunity in the MLP space of the energy market.”

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