BlackRock Energy and Resources Income Trust first half NAV per share rose by 35.9%
BlackRock Energy and Resources Income Trust plc (LON:BERI) has announced its latest portfolio update.
PERFORMANCE RECORD
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As at 31 May 2022 |
As at 30 November 2021 |
| Net assets (£’000)1 | 179,542 | 120,828 |
| Net asset value per ordinary share (pence) | 138.60 | 103.97 |
| Ordinary share price (mid-market) (pence) | 142.00 | 96.70 |
| Premium/(discount) to net asset value2 | 2.5% | (7.0%) |
| ————— | ————— | |
| Performance (with dividends reinvested) | ||
| Net asset value per share2 | 35.9% | 34.4% |
| Ordinary share price2 | 49.7% | 41.7% |
| ========= | ========= |
|
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For the six months ended 31 May 2022 |
For the six months ended 31 May 2021 |
Change |
| Revenue | |||
| Net profit on ordinary activities after taxation (£’000) | 2,965 | 2,356 | +25.8 |
| Revenue earnings per ordinary share (pence)3 | 2.42 | 2.07 | +16.9 |
| ————— | ————— | ————— | |
| Interim dividends (pence) | |||
| 1st interim | 1.10 | 1.00 | +10.0 |
| 2nd interim4 | 1.10 | 1.00 | +10.0 |
| Total dividends paid/payable | 2.20 | 2.00 | +10.0 |
| ========= | ========= | ========= |
1 The change in net assets reflects market movements, the issue and reissue of shares and dividends paid during the period.
2 Alternative Performance Measures, see Glossary included within the Half Yearly Financial Report (which can be found on the Company’s website at www.blackrock.com/uk/beri).
3 Further details are given in the Glossary included within the Half Yearly Financial Report (which can be found on the Company’s website at www.blackrock.com/uk/beri).
4 Paid on 15 July 2022.
CHAIRMAN’S STATEMENT
Firstly, as this is my first report to you since taking over as Chairman in March this year, I would like to say how excited I am to be taking on the role at a time of such opportunity for your Company – both from the short-term supply pressures, but also, more importantly, from the longer, secular opportunity presented by the energy transition. My fellow Board members and I believe that the Company is well-positioned to take advantage of this for shareholders, and, at the same time, to support the transition to a more sustainable energy economy. I would also like to take this opportunity to thank my predecessor, Ed Warner, for his many years of excellent service, and for leaving the Company with the solid base and clear direction, from which we can all now look forward with confidence. We wish him well.
MARKET OVERVIEW
As the Company’s financial year began on 1 December 2021, markets were buoyant with many major indices achieving either all-time highs or pre-COVID-19 levels. However, supply constraints coupled with increasing demand as post-COVID-19 economic activity restarted, caused inflation to rise sharply. An already challenging market environment was exacerbated by Russia’s invasion of Ukraine and the resulting humanitarian crisis. The energy supply shock that resulted drove energy prices ever higher, pushing inflation to a 40 year high of 9.4% in the UK in June 2022.
Against this backdrop, the Traditional Energy sector had the strongest start to the year in both relative and absolute terms (the MSCI World Energy Index was up by 51.6% over the period compared to an increase in the MSCI ACWI Metals and Mining Index of 12.7% – both in US Dollar terms with dividends reinvested). In contrast the Energy Transition portion of the portfolio performed less well as margins were impacted by cost inflation and a “growth” to “value” rotation drove a sell-off in share prices in high growth sectors. Your Company’s portfolio was well-positioned to weather these trends, as the portfolio managers increased Traditional Energy exposure through 2021 and into 2022 to stand at 41.0% at the end of the period, and moved to lower weighting in the Energy Transition sector (21.1% at 31 May 2022).
PERFORMANCE
During the six months ended 31 May 2022, the Company’s net asset value (NAV) per share rose by 35.9% and its share price rose by 49.7% (both percentages in Sterling terms with dividends reinvested). Although the Company does not have a formal benchmark, to set this in the context of the market backdrop, the EMIX Global Mining (ex Gold) Index rose by 5.1% and the MSCI World Energy Index rose by 59.1% over the same period (both percentages in Sterling terms with dividends reinvested). The Company had 21.1% of its portfolio invested in stocks with exposure to the Energy Transition sector and the decarbonisation of the energy supply chain as at 31 May 2022. There is no reference index that currently reflects the composition of the investment universe for this sector, but for illustrative purposes, the S&P Global Clean Energy Index decreased by 10.5% and the Wilderhill Clean Energy Index decreased by 34.2% over the same period (both in Sterling terms with dividends reinvested).
The Board does not formally benchmark the Company’s performance against Mining and Energy sector indices because meeting a specific dividend target is not within the scope of these indices and also because no index appropriately reflects the Company’s blended exposure to the Energy (including the Energy Transition) and Mining sectors. For internal monitoring purposes, however, the Board compares the performance of the portfolio against a bespoke internal Mining and Energy composite index.
The neutral sector weightings of this bespoke index are 40% Mining, 30% Traditional Energy and 30% Energy Transition.
Further information on investment performance is given in the Investment Managers’ Report.
REVENUE RETURN AND DIVIDENDS
The Company’s revenue return per share for the six-month period was 2.42 pence per share, an increase of 16.9% over the same period last year (the revenue return for the six months to 31 May 2021 was 2.07 pence per share). The Board’s current target is to declare quarterly dividends of at least 1.10 pence per share in the year to 30 November 2022, making a total of at least 4.40 pence per share for the year as a whole. This target represents a yield of 3.1% based on the share price of 142.00 pence per share as at 31 May 2022, and 3.8% based on the share price at the close of business on 2 August 2022.
The first quarterly interim dividend of 1.10 pence per share was paid on 21 April 2022 and the second quarterly interim dividend of 1.10 pence per share was paid on 15 July 2022 (three quarterly interim dividends each of 1.00 pence per share and one quarterly dividend of 1.10 pence per share were paid in the twelve months ended 30 November 2021).
The Company may also write options to generate revenue return, although the portfolio managers’ focus is on investing the portfolio to generate an optimal level of total return without striving to meet an annual income target. Consequently, they will only enter into option transactions with the intention that the overall contribution is beneficial to total return.
GEARING
The Company operates a flexible gearing policy which depends on prevailing market conditions. It is not intended that gearing will exceed 20% of the gross assets of the Company. The maximum gearing used during the period was 12.3%, and the level of gearing at 31 May 2022 was 8.5%. For calculations, see the Glossary included within the Half Yearly Financial Report (which can be found on the Company’s website at www.blackrock.com/uk/beri).
MANAGEMENT OF SHARE RATING
The Directors recognise the importance to investors that the Company’s share price should not trade at a significant premium or discount to NAV, and therefore, in normal market conditions, may use the Company’s share buyback, sale of shares from treasury and share issuance powers to ensure that the share price is broadly in line with the underlying NAV.
The Company’s shares started the period under review trading at a discount of 7.0%; this widened to 9.2% in December but subsequently the shares moved to trade fairly consistently at a premium from January 2022 to the end of the period under review. To manage the premium, the Company sold all of its treasury shares and issued new shares into market demand in 2022. Over the period under review, the Company issued/sold 13,322,034 shares (2,747,643 from treasury) for net proceeds of £16,357,000. At the Company’s annual general meeting held on 15 March 2022, the Company was granted authority to allot up to 11,859,336 shares and/or sell the same amount of shares held in treasury on a non-pre-emptive basis (being equivalent to 10 per cent of share capital in issue at that time). However, given the ongoing volume of demand, the Board decided in April to seek additional authority to allot and/or sell from treasury a further 12,844,039 ordinary shares on a non-pre-emptive basis. This action was taken to ensure that the Company could continue to be able to allot new shares to meet market demand and thereby help to manage the premium to NAV at which the shares were trading. The additional authority was approved by shareholders at a General Meeting of the Company held on 26 May 2022. I am pleased to note that, subsequent to the period end, on 17 June 2022 the Company was promoted from the FTSE Fledgling Index into the FTSE Small Cap Index (and also therefore the FTSE All Share Index) which generated additional demand, with a further 4.8 million shares being issued in June 2022 for net proceeds of £6.4 million. Unfortunately markets corrected again in late June as fears over the potential recessionary impact of central banks’ reaction to inflation pressures took hold; this volatility created challenges for many investment companies with the average discount for the sector widening significantly. With the Company’s shares moving back to trading at a discount in the latter part of June, the Board has monitored the market throughout and, in conjunction with the Company’s broker, has given consideration to the possibility of buying back shares on a daily basis. As at 2 August 2022 the Company’s shares are trading at a discount of 5.1%.
PLACING PROGRAMME
As well as seeking authority to issue an additional 12,844,039 shares as described above, the Board also sought authority at the general meeting on 26 May 2022 to allot on a non-pre-emptive basis up to 65 million ordinary shares pursuant to a Placing Programme (which would only proceed with the publication of a prospectus, if appropriate, in due course). The Board took this step to ensure that the Company was not constrained in its ability to issue new shares to meet demand. Under normal circumstances, a company is required to publish a prospectus in order for its securities to be admitted to a regulated market; however, the Prospectus Regulation Rules provide an exemption from this requirement if less than 20% of a company’s share capital is issued over a rolling twelve month period. The Company currently has 134,356,194 shares in issue and can therefore issue 26,871,238 shares over a rolling twelve month period before a new prospectus is required. As at 2 August 2022, the Company has remaining the capacity to issue 11,481,044 shares under this exemption. Depending on the level of market demand for the Company’s shares over the coming months, it is possible that issuance may exceed the 20% limit before the end of the year. In this event, the Board would anticipate needing to publish a prospectus to support continued share issuance.
In taking these steps to ensure that the Company can continue to issue shares into market demand, the Board notes that all share issues have been and will continue to be made at premiums to the prevailing NAV per share, such that all such transactions are accretive to the NAV and NAV per share so that existing shareholders are protected from any value/economic dilution.
MARKET OUTLOOK & PORTFOLIO POSITIONING
As market concerns over the rising risks of recession saw a pullback in commodity prices in recent weeks, the Company’s NAV per share has fallen by 11.1% since the end of the period under review (up until the close of business on 2 August 2022). The share price fell by 17.6% over the same time frame (all calculations with dividends reinvested).
With the impact of the COVID-19 pandemic receding, the longer-term implications for the global economy are beginning to play out, compounded by increased geopolitical tensions. Commodity prices remain elevated, partly due to the war in Ukraine and the continued sanctions on Russia, while labour markets remain tight, underpinning higher inflation trends in the US and Europe. This has put increasing pressure on central banks to raise interest rates, increasing the risks to economic growth. However, either way, it is likely that inflation remains entrenched above central bank targets for some time to come.
Against this volatile and uncertain market backdrop, the flexibility of the Company’s investment mandate, with the ability to shift exposure between Traditional Energy, Energy Transition and Mining sectors, means that it is uniquely positioned to serve investors well. Despite the current uncertainty, the longer-term drive by governments across the globe to decarbonise the energy supply chain and create a greener energy infrastructure is here to stay and has been given increased focus by the events in Ukraine. Over the long term, capital investment in the relevant infrastructure and technological advances will create compelling investment opportunities both in the Energy Transition sector and for the companies that service the associated supply chains. The Board is confident that the Company remains well-placed to benefit from these key investment trends.
ADRIAN BROWN
Chairman
4 August 2022
INVESTMENT MANAGERS’ REPORT
MARKET OVERVIEW
The first half of 2022 has been an extraordinary six months for commodity markets, commodity producers and for the future of global energy. Broader equity markets have had to come to terms with the pivot to a rising interest rate environment, and the resulting rotation in equity markets away from growth stocks towards value has been a significant driver of positive returns for the Company’s portfolio. The Traditional Energy sector has had the strongest start seen to a year since the MSCI World Energy Index was launched in 1996, in both absolute terms and relative to other sectors in the market. The Company’s portfolio has been well positioned to capture this, having increased Traditional Energy exposure through 2021 as we saw an increasingly attractive outlook for oil and gas markets and a sector full of companies that are focused on shareholder returns. Later in the report we will detail where we have seen the best returns and how we see the energy market evolving from here, as well as the implications for the shape and speed of the energy transition.
The last six months have also seen the resurgence of inflation. We have commented in previous reports and presentations that we believed inflation would be higher and more persistent than markets were anticipating. The underinvestment in many primary industries has resulted in raw materials and energy supply struggling to keep pace with demand and left markets vulnerable to any disruptions to supply. Europe has been at the epicentre of this recently – a summer in 2021 with little wind across Europe led to gas inventories being meaningfully lower than usual going into the winter. The resulting gas price spikes and electricity price spikes have sent shockwaves through industrial and residential consumers and have been a key driver of inflation in Europe. Although inflation may ease from the very high rates we are currently experiencing, we think we have entered a ‘higher for longer’ inflation regime and that carefully considered investments in the energy and materials space can be additive to investment portfolios.
It would also be remiss not to mention the impact the war in Ukraine has had on energy and commodity markets. The chart on page 9 of the Half Yearly Financial Report shows how important the three countries at the centre of the war are to the global commodity supply mix. There are some commodities – in particular fertilisers such as potash – where the supply-demand dynamic globally has been altered in a significant way. Much of the production of potash from Belarus and Russia has been shut down, driving prices higher and threatening availability of product in some countries. However, for other commodities, including oil, the conflict and the sanctions imposed on Russia have not changed the overall supply situation but have meaningfully shifted the patterns of global trade in these commodities. The longer-term impacts of the war and the policy response to it are probably only going to become clear later this year. Key to this will be the European (and – to a lesser extent – US) decisions on Russian gas, where there could very well be a trade-off decision needed by politicians in terms of energy cost in Europe versus impact on Russia/Russian interests.
What has become increasingly obvious over the last six months is the need for greater energy security in Europe in terms of reliability of energy supply, and at a price point that does not negatively impact consumers and industry in the way recent energy costs have done.
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Commodity |
31 May |
30 November |
% change |
2022 on 2021 Average Price % Change (Average of 30/11/20- 31/05/21 to 30/11/21- 31/05/22) |
| Base Metals (US$/tonne) | ||||
| Aluminium | 2,758 | 2,635 | 4.7 | 42.1 |
| Copper | 9,446 | 9,516 | -0.7 | 12.4 |
| Lead | 2,174 | 2,318 | -6.2 | 12.9 |
| Nickel | 28,344 | 20,005 | 41.7 | 59.9 |
| Tin | 34,935 | 39,905 | -12.5 | 60.1 |
| Zinc | 3,939 | 3,289 | 19.8 | 35.0 |
| ========= | ========= | ========= | ========= | |
| Precious Metals (US$/ounce) | ||||
| Gold | 1,845.1 | 1,780.1 | 3.7 | 3.1 |
| Silver | 21.8 | 22.8 | -4.4 | -10.0 |
| Platinum | 963.0 | 944.0 | 2.0 | -13.9 |
| Palladium | 2,032.0 | 1,767.0 | 15.0 | -13.5 |
| ========= | ========= | ========= | ========= | |
| Energy | ||||
| Oil (West Texas Intermediate) (US$/barrel) | 114.7 | 66.2 | 73.3 | 63.5 |
| Oil (Brent) (US$/barrel) | 125.5 | 70.6 | 77.8 | 62.5 |
| Natural Gas (US$/Metric Million British Thermal Unit) | 8.5 | 4.6 | 84.8 | 74.2 |
| ========= | ========= | ========= | ========= | |
| Bulk Commodities (US$/tonne) | ||||
| Iron ore | 138.5 | 100.0 | 38.5 | -22.1 |
| Coking coal | 434.0 | 317.5 | 36.7 | 236.6 |
| Thermal coal | 427.0 | 152.0 | 180.9 | 209.6 |
| ========= | ========= | ========= | ========= | |
| Equity Indices | ||||
| MSCI ACWI1 Metals & Mining Index (US$) | 403.0 | 357.7 | 12.7 | n/a |
| MSCI ACWI1 Metals & Mining Index (£) | 321.9 | 270.4 | 19.0 | n/a |
| MSCI2 World Energy Index (US$) | 448.0 | 295.6 | 51.6 | n/a |
| MSCI2 World Energy Index (£) | 591.4 | 371.8 | 59.1 | n/a |
| ========= | ========= | ========= | ========= |
Source: Datastream, May 2022.
1 Morgan Stanley Capital International All Country Weighted Index.
2 Morgan Stanley Capital International.
PORTFOLIO ACTIVITY AND INVESTMENT PERFORMANCE
The first half of 2022 was very strong from a performance perspective with the Company’s NAV per share increasing 35.9% (in Sterling terms with dividends reinvested) from 103.97 pence per share to 138.60 pence per share. During the period, the Company’s shares often traded at a premium to its NAV, which enabled the issuance of 10,574,391 million new shares and 2,747,643 treasury shares.
The key driver of the portfolio’s strong performance over the six months was the holdings in Traditional Energy companies, where some of the best performance came from our holdings in Canadian natural gas companies (for example Cenovus Energy and Tourmaline Oil) as well as the US Exploration & Production holdings. The other main contributor to performance was the stock selection in the Mining sector. Glencore performed well relative to other mining stocks as its trading business outperformed expectations and the company continued to focus on shareholder returns via buybacks. The portfolio’s holding in a major lithium company – Sociedad Química y Minera – also added to performance as the lithium price strength drove significant earnings upgrades for the company. There were some holdings that performed less well during the period, notably the Energy Transition focused industrial companies (for example Schneider Electric) and wind turbine manufacturers such as Vestas Wind. Although the outlook for their end markets remains robust and may well improve with the focus on energy cost and security, in the short term these companies have struggled with cost inflation. This is something new for many parts of the Energy Transition sector and we think the market is still underestimating the inflation impact on margins, hence we are holding a lower weight in Energy Transition companies compared to Traditional Energy at this point.
The shape of the portfolio from a Mining, Traditional Energy and Energy Transition standpoint remained fairly consistent during the first half of the year. As the portfolio positioning chart on page 11 of the Half Yearly Financial Report shows, we continued to have greater exposure to Traditional Energy than Energy Transition. As articulated above, whilst we continue to be excited about the growth of renewable generation and many industries related to the Energy Transition, there are margin headwinds in the current inflationary environment that we think are not fully factored into share prices/valuations. On the Mining side, we scaled back our positions in comparison to much of 2021 given the challenging demand situation in China, which is described in greater detail in the Mining section below.
Within the sectors, we made changes during the six months as we reacted to what were often rapidly changing market conditions. One of the most notable of these changes was to increase our refining exposure on the Traditional Energy side as refining margins increased to historically high levels. With strong product demand and very little investment in new refining capacity, we think the outlook for this sub-sector is stronger than is currently reflected in current market valuations.
INCOME
The income outlook continues in the theme of the last few reports – despite the persistent strong commodity price environment, companies in the Traditional Energy sector and Mining sector have once again prioritised returns to shareholders with numerous dividend increases and share buybacks announced across the portfolio’s holdings. Given the remuneration incentives in place for most management teams, we would expect to see this behaviour continue unless there is a significant negative shock to earnings/cashflow.
Option income was modest during the first half of the year with option premium accounting for a small percentage of overall income. Following the end of the first half, volatility increased and with the correction in markets a broader opportunity set for selling put options emerged, so some attractive income was generated.
Following last years’ strong performance by the Traditional Energy sector (+18% versus MSCI ACWI World Index in calendar year 2021), the Traditional Energy sector posted its strongest start to any year since the indices started trading in 1996 (+47% versus MSCI ACWI World Index through 31 May 2022, see the chart on page 12 of the Half Yearly Financial Report (which can be found on the Company’s website at www.blackrock.com/uk/beri)).
PORTFOLIO POSITIONING
Whilst record high commodity prices certainly contributed to the outperformance, a notable shift in US Federal Reserve (Fed) policy towards quantitative tightening saw a significant shift from growth to value stocks as real interest rates turned firmly positive for the first time since early 2019 (see the chart on page 13 of the Half Yearly Financial Report (which can be found on the Company’s website at www.blackrock.com/uk/beri)). The Company saw strong performance from its holdings in natural gas-exposed and refining companies during the period – two themes which look likely to persist in the months ahead.
In last year’s Annual Report, we outlined a number of key themes that we expected to shape 2022. On the one hand, a steadily improving global economy would drive demand recovery in traditional resources sectors. With an overlay of continued capital discipline, supply would struggle to respond to rising demand, driving commodity prices higher in order to rebalance markets. Moreover, logistical tightness would press even harder on inflation leaving many of the Energy Transition sectors facing margin and growth pressure.
The most important event in the period was Russia’s late-February invasion of Ukraine. Since Russia exports a considerable amount of oil, gas and oil products, metals and food to Europe and North Africa the threat of curtailment of any or all of these key resources has undoubtedly catalysed higher prices in the first half of the year. The response of many countries to the invasion was swift and primarily directed at choking back the flow of remittances to Russia in an effort to combat its efforts in Ukraine. The resultant rise in commodity prices has been sharp and broad with US retail gasoline prices surpassing the highs seen during the 2008-09 global financial crisis (see the chart on page 13 of the Half Yearly Financial Report) causing a cost-of-living crisis not seen since the 1980s, when we last had a major commodity-driven economic slowdown.
The longer-term implications of record high energy prices have placed security-of-supply at the top of policy makers’ agendas. Europe in particular has put in place a bold plan to permanently wean itself off Russian energy imports – something it expects to achieve before the end of the decade. Whilst crude oil and oil products are readily fungible in a global market (and we have seen Russian seaborne crudes reroute from Europe to Asia in particular), natural gas is much harder to replace. It is here that Europe will struggle to meet its ambitions to replace some 150 billion cubic metres (bcm) of annual Russian gas imports. New gas supply will need to be sourced from an already tight global gas market and policy makers may find that new sources present new geopolitical risks. Added to this, Germany has no harbour as yet capable of receiving liquefied natural gas.
ENERGY TRANSITION
High and volatile energy prices have made their presence felt globally. Record oil and natural gas prices have fed into regional power and carbon markets driving up energy bills for the end-consumer. Combined with rising interest rates, record high energy bills are squeezing the consumer and policy makers have reacted with planned, and in some cases implemented, short-term price caps in many jurisdictions. Energy providers, particularly utility companies, have subsequently underperformed in part due to market concerns over windfall taxes (see the chart on page 14 of the Half Yearly Financial Report (which can be found on the Company’s website at www.blackrock.com/uk/beri)). Elsewhere, persistent supply-chain bottlenecks (materials and skilled labour) are hampering the build out of renewables capacity across the globe – with the S&P Global Clean Energy Index sharply underperforming the MSCI ACWI Energy Index through since the start of this year (see the chart on page 14 of the Half Yearly Financial Report (which can be found on the Company’s website at www.blackrock.com/uk/beri)). Solar stocks in the United States were also negatively impacted by the announcement of an anti-dumping case in March which is seeking to prevent ‘cheap’ solar panel imports from overseas suppliers.
During the period, the Company reduced its exposure to European utilities and solar stocks as high-power prices attracted windfall taxes (real and planned) and logistics inflation hampered margins for the latter group.
During 2020, Europe relied on Russia for more than one quarter of its oil, 40% of its natural gas and almost half of its thermal coal imports. Not surprising then that, following the invasion of Ukraine, policy makers have announced sweeping changes to wean the bloc off Russian energy imports by 2027. European Commission (EC) President Ursula von der Leyen announced the REPowerEU plan in mid-May. The plan will rely on four broad areas: energy efficiency, energy diversification, acceleration of renewables and smart grid investments. The plan seeks to double solar capacity by 2025 (from prior planned levels) as well as doubling the rate of deployment of heat pumps – both positive long-term tailwinds for renewables. The EC also proposed bold new plans to target 20mnt of renewable hydrogen, almost four times the amount initially envisaged under the Fit For 55 plan.
Whilst the outlook for renewables investments has undoubtedly improved under this new plan, the outlook for traditional energy sources has been boosted too. In order to replace existing Russian gas supplies (circa 155bcm in 2021) Europe will need to source liquefied natural gas (LNG) imports from regions such as North America and the Middle East. With limited growth expected in the near term from new LNG projects, this should serve to keep global gas markets tighter for longer.
MINING
The first half of the year saw great dispersion in the returns across various mined commodities and, as a result, high dispersion in the returns of mining company shares. The mined commodities with the closest links to the energy market – thermal coal and aluminium (given the high percentage of operating costs that are electricity) – were the standout performers. Aluminium did give back some of the gains towards the end of the period as the market grew nervous of potential Chinese supply recovery. However the average price for the six-month period was still very impressive versus the same period in 2021. Thermal coal prices increased by almost two hundred percent, as power producers globally scrambled for raw materials on the back of gas shortages. Whilst we would not expect these truly exceptional prices to be maintained for any length of time, the lack of capital investment into coal mining has left the industry unable to bring on any supply even in extreme situations – this lack of price elasticity of supply can result in sharp, short term, price rises such as those we are seeing currently. This may occur in other commodities going forward where under investment in maintaining or growing supply has also been occurring. We do not own dedicated thermal coal companies in the portfolio; however, the Company’s largest holding – Glencore – is a major producer of mined commodities including thermal coal and so has benefited to some degree from the price levels and volatility. The company has outlined a responsible plan to run down its coal reserves – allowing its customers to transition away from coal in a controlled manner and allowing them to operate the assets to the highest safety and environmental standards.
The mined commodities have suffered supply issues through the last six months as a result of short-term factors – Russia/Ukraine – and longer ones – lack of investment in maintenance/growth capital. On the former, the impacts on prices have been less significant than perhaps expected, as either sanctions have not been applied to metals such as palladium, or trade flows have adapted quickly to divert material to countries with fewer or no sanctions on Russia. The longer-term issue of underinvestment in new supply and, in some cases, insufficient investment in maintenance capital, has started to show itself in a selection of data releases. For example, Chile’s copper production year to date is down around 8% versus 2021 – this was blamed on COVID-19 disruptions in the initial months, but even after that wave passed, the production weakness has remained. Why has this type of production disruption not resulted in even stronger pricing? Whilst the market’s – and our – excitement about future metals demand growth being driven by decarbonisation spend remains, we have to remember that China still accounts today for around half of all metals demand. The problems in China’s real estate sector, that we discussed in the 2021 Annual Report, continue to be an obstacle to the recovery in private sector activity in the country. However, an equally large factor is the country’s zero-COVID-19 policy that has meant it has been almost impossible for commodity intensive economic activity to restart in earnest. We had been expecting infrastructure spend – driven by government stimulus – to accelerate in the first half of 2022 but this now looks unlikely to occur until the latter part of the year at best. This dynamic has been the key driver in us tempering the near-term enthusiasm for mining companies in the portfolio – hence ending the period with the lowest percentage of the portfolio invested in the sector for over three years.
There are some bright spots near-term in the Mining space – lithium, for example, continues to experience a significant imbalance of supply versus demand, which has resulted in very strong upward price moves in the last twelve months. Even though there is investment into new lithium mines and processing facilities, there is a high probability that the supply delivered to the market in the next 3-5 years will be insufficient to meet the needs of a rapidly growing electric vehicle (EV) market and energy storage sector. We therefore believe prices will remain stubbornly high and material availability could be the major constraining factor on the pace of change in these sectors. Such is the level of concern from lithium consumers on this that, subsequent to the end of the half year, Stellantis (the listed parent company of Jeep, Fiat and other car brands) took an equity stake in a lithium mine developer. This is the first investment of this nature by an auto company/consumer of lithium with the aim of securing raw material supply – we do not think it will be the last.
Finally, for Mining, a word on precious metals. Although short-term inflation has been exceptionally high and central banks have been well behind the curve in terms of responding to this with higher nominal interest rates, the longer-term picture has seen 10-year real rates go from negative 100bps to around positive 50bps in the last six months. Gold has had a strong inverse correlation to US ten-year real rates so given the increase in real rates, a move down in gold would have been expected. However – as with many correlations in markets in the last six months – that relationship has broken down and despite higher real rates and a stronger US Dollar, gold has been remarkably resilient.
We would expect it to remain so given the unpredictable geopolitical landscape as well as a market environment where equities and bonds have at times been positively correlated (so people will seek out alternative portfolio diversifiers, such as gold). However gold miners are not immune from cost inflation so in the portfolio we have chosen to take our modest gold exposure, through a combination of Newmont Corporation (the world’s largest and arguably highest quality gold miner) and Wheaton Precious Metals (a royalty/streaming company that is not exposed to cost inflation as it receives a percentage of revenue, not profits, from each asset in which it has an interest).
MARKET OUTLOOK AND PORTFOLIO POSITIONING
Inflation pressures have caught central banks off-guard, and we continue to believe that the duration of inflationary pressures is being underestimated by the market. The causes of these stresses are rooted in years of under-investment in both Traditional Energy and broader mined commodities. As the world shifts away from a ‘just-in-time’ to ‘just-in-case’ logistics chain, it seems unlikely that we will see a retrenchment to the low inflationary environment we have been rather accustomed to over the last couple of decades.
The recent and severe market correction this year has opened up some compelling valuation opportunities across all three pillars of the Company’s investment universe: Mining, Traditional Energy and Energy Transition. The flexibility to tilt across these pillars should serve shareholders well as we expect continued volatility in the months ahead as markets digest a new interest rate regime.
From a demand perspective, upside risks remain in traditional commodities as China is still emerging from a recent spate of lockdowns and international travel begins to resume – likely boosting global jet fuel demand. Consumption of bulk materials should also be supported as the Chinese economy reopens and infrastructure spending resumes. The government also recently announced new stimulus measures to boost electric vehicle sales.
From a supply standpoint, physical markets remain tight across traditional commodities. In particular, global diesel and gasoline markets remain incredibly tight as almost 2 million barrels per day of refining capacity was closed in the last two years (global product demand is a little under 100 million barrels per day). Copper supply is also facing constraints as key producers such as Peru (local community protests) and Chile (access to water challenges) face headwinds at a time when copper inventories remain at seasonal lows (see the chart on page 17 of the Half Yearly Financial Report (which can be found on the Company’s website at www.blackrock.com/uk/beri)).
As a parting thought, it would be remiss not to mention the recent pullback in commodity prices and the share prices of commodity producers from the highs seen during the first half of the year. Whilst some of the falls might be attributed to the rising risk of recession, especially in Europe, the structural factors that underpin our positive outlook across the energy transition space and parts of the mining and traditional energy space remain firmly in place. Balance sheets of companies in the portfolio remain as strong as they have been in almost 25 years and we have seen some companies look to take advantage of these market conditions to buy back shares at what they see as attractive price levels. The supply challenges across the market have continued to be seen in the half year results of companies both in and outside of the portfolio, which hardens our conviction that commodity markets have upside risk to prices as supply will struggle to meet demand, with any recessionary impact only delaying that dynamic, not removing it.
TOM HOLL AND MARK HUME
BlackRock Investment Management (UK) Limited
4 August 2022
DISTRIBUTION OF INVESTMENTS AS AT 31 MAY 2022
ASSET ALLOCATION – GEOGRAPHY
| Global | 50.5% |
| United States | 18.8% |
| Canada | 12.7% |
| Brazil | 5.5% |
| Germany | 4.2% |
| Australia | 3.9% |
| Spain | 1.6% |
| Chile | 1.0% |
| Ireland | 0.7% |
| France | 0.6% |
| India | 0.5% |
Source: BlackRock
ASSET ALLOCATION – COMMODITY
| Traditional Energy | 41.0% |
| Mining | 37.9% |
| Energy Transition | 21.1% |
| Traditional Energy | 41.0% |
| Exploration & Production | 17.2% |
| Integrated | 14.0% |
| Refining & Marketing | 4.1% |
| Oil Services | 3.7% |
| Distribution | 2.0% |
| Mining | 37.9% |
| Diversified | 18.9% |
| Industrial Minerals | 6.9% |
| Copper | 3.1% |
| Steel | 2.8% |
| Aluminium | 1.9% |
| Gold | 1.9% |
| Nickel | 0.9% |
| Diamonds | 0.9% |
| Iron | 0.6% |
| Energy Transition | 21.1% |
| Electrification | 7.0% |
| Energy Efficiency | 6.3% |
| Transport | 4.7% |
| Renewables | 3.1% |
Source: BlackRock
TEN LARGEST INVESTMENTS
1 + GLENCORE (2021: 2nd)
Diversified mining group
Market value: £12,983,000
Share of investments: 6.7% (2021: 5.8%)
One of the world’s largest globally diversified natural resources groups. The group’s operations include approximately 150 mining and metallurgical sites and oil production assets. Glencore’s mined commodity exposure includes copper, cobalt, nickel, zinc, lead, ferroalloys, aluminium, iron ore, gold and silver.
2 – VALE (2021: 1st)
Diversified mining group
Market value: £10,739,000
Share of investments: 5.5%1 (2021: 5.9%)
One of the largest mining groups in the world with operations in 30 countries. Vale is the world’s largest producer of iron ore and iron ore pellets, and the world’s largest producer of nickel. The group also produces manganese ore, ferroalloys, metallurgical and thermal coal, copper, platinum group metals, gold, silver, cobalt, potash, phosphates and other fertiliser nutrients.
3 + SHELL (2021: n/a)
Integrated oil group
Market value: £6,132,000
Share of investments: 3.1% (2021: n/a)
A British publicly traded multinational oil and gas group headquartered in London, United Kingdom. Shell is a public limited company with a primary listing on the London Stock Exchange and secondary listings on Euronext Amsterdam and the New York Stock Exchange.
4 + CONOCOPHILLIPS (2021: 7th)
Exploration & Production
Market value: £5,232,000
Share of investments: 2.7% (2021: 2.7%)
An American multinational corporation engaged in hydrocarbon exploration. ConocoPhillips is one of the world’s largest independent Exploration & Production (E&P) groups based on production and proved reserves. It has operations in 15 countries and is committed to the efficient and effective exploration and production of oil and natural gas.
5 + SUNCOR ENERGY (2021: 18th)
Integrated oil group
Market value: £5,161,000
Share of investments: 2.6% (2021: 1.8%)
A Canadian integrated energy group based in Calgary, Alberta. It specialises in production of synthetic crude from oil sands.
6 + CENOVUS ENERGY (2021: 17th)
Integrated oil group
Market value: £4,953,000
Share of investments: 2.5% (2021: 1.8%)
An integrated oil and natural gas group headquartered in Calgary, Alberta. Cenovus Energy was formed in 2009 when Encana Corporation split into two distinct companies, with Cenovus Energy becoming focused on oil sands assets.
7 – FIRST QUANTUM MINERALS (2021: 6th)
Copper producer
Market value: £4,828,000
Share of investments: 2.5%2 (2021: 3.5%)
An established growing copper mining group operating seven mines including the ramp-up of their newest mine, Cobre Panama, which declared commercial production in September 2019. The group is a significant copper producer and also produces nickel, gold and zinc.
8 + TOTALENERGIES (2021: 9th)
Integrated oil group
Market value: £4,768,000
Share of investments: 2.4% (2021: 2.2%)
A French multinational integrated oil and gas group, which is one of the seven supermajor oil groups. The group has rebranded from Total to TotalEnergies, as it looks to be a world-class player in the energy transition sector.
9 + SAMSUNG SDI (2021: 21st)
Transport
Market value: £4,767,000
Share of investments: 2.4% (2021: 1.7%)
A specialty chemicals group operating across two main divisions: Energy and Electronic Materials. Energy Solutions manufactures small-sized Lithium-ion batteries for portable electronics (laptop, tablets, mobiles), tools and electric bikes/scooters. It also develops larger batteries for automotive electric vehicles applications and energy storage systems.
10 + RWE (2021: 13th)
Electrification
Market value: £4,749,000
Share of investments: 2.4% (2021: 2.0%)
Germany’s leading clean energy utility, which is pivoting to be more renewables focused.
1 1.5% relates to fixed interest holdings in Vale.
2 0.8% relates to fixed interest holdings in First Quantum Minerals.
All percentages reflect the value of the holding as a percentage of total investments. For this purpose, where more than one class of securities is held, these have been aggregated. The percentages in brackets represent the value of the holding as at 30 November 2021.
Together, the ten largest investments represent 32.8% of total investments (ten largest investments as at 30 November 2021: 36.4%).
INVESTMENTS AS AT 31 MAY 2022
|
|
Main geographic exposure |
Market value £’000 |
% of investments |
|
| Traditional Energy | ||||
| Exploration & Production | ||||
| ConocoPhillips | Global | 5,232 | 2.7 | |
| Ovintiv | United States | 4,038 | 2.1 | |
| Tourmaline Oil | Canada | 3,827 | 2.0 | |
| Hess | Global | 3,456 | 1.8 | |
| EOG Resources | United States | 3,293 | 1.7 | |
| Canadian Natural Resources | Canada | 3,220 | 1.7 | |
| Pioneer Natural Resources | United States | 3,178 | 1.6 | |
| Arc Resources | Canada | 2,794 | 1.4 | |
| Santos | Australia | 2,113 | 1.1 | |
| Kosmos Energy | United States | 1,489 | 0.8 | |
| Woodside Energy Group | Australia | 526 | 0.3 | |
| ————— | ————— | |||
| 33,166 | 17.2 | |||
| ========= | ========= | |||
| Integrated | ||||
| Shell | Global | 6,132 | 3.1 | |
| Suncor Energy | Canada | 5,161 | 2.6 | |
| Cenovus Energy | Canada | 4,953 | 2.5 | |
| TotalEnergies | Global | 4,768 | 2.4 | |
| Repsol YPF | Spain | 3,178 | 1.6 | |
| Equinor | Global | 1,722 | 0.9 | |
| Chevron | Global | 1,717 | 0.9 | |
| Gazprom ADR* | Russian Federation | – | – | |
| ————— | ————— | |||
| 27,631 | 14.0 | |||
| ========= | ========= | |||
| Refining & Marketing | ||||
| Phillips 66 | Global | 3,371 | 1.7 | |
| Valero Energy | United States | 2,462 | 1.3 | |
| Marathon Petroleum | United States | 2,111 | 1.1 | |
| ————— | ————— | |||
| 7,944 | 4.1 | |||
| ========= | ========= | |||
| Oil Services | ||||
| Halliburton | Global | 2,538 | 1.3 | |
| Patterson-UTI Energy | United States | 2,319 | 1.2 | |
| Tenaris | Global | 2,298 | 1.2 | |
| ————— | ————— | |||
| 7,155 | 3.7 | |||
| ========= | ========= | |||
| Distribution | ||||
| Cheniere Energy | United States | 2,042 | 1.0 | |
| TC Energy Corporation | Canada | 2,007 | 1.0 | |
| ————— | ————— | |||
| 4,049 | 2.0 | |||
| ========= | ========= | |||
| Total Traditional Energy | 79,945 | 41.0 | ||
| ========= | ========= | |||
| Mining | ||||
| Diversified | ||||
| Glencore | Global | 12,983 | 6.7 | |
| Vale | Brazil | 7,747 | } | 5.5 |
| Vale Debentures** | Brazil | 2,992 | ||
| BHP | Global | 4,365 | 2.2 | |
| Teck Resources | Global | 3,462 | 1.8 | |
| Anglo American | Global | 3,248 | 1.7 | |
| Trident | Global | 1,184 | 0.6 | |
| Rio Tinto | Global | 846 | 0.4 | |
| ————— | ————— | |||
| 36,827 | 18.9 | |||
| ========= | ========= | |||
| Industrial Minerals | ||||
| Nutrien | United States | 2,718 | 1.4 | |
| CF Industries | United States | 2,330 | 1.2 | |
| Sociedad Química y Minera | Chile | 2,001 | 1.0 | |
| Albemarle | Global | 1,956 | } | 1.0 |
| Albemarle Put Option 17/06/22 $22 | Global | (18) | ||
| Bunge | Global | 1,759 | 0.9 | |
| Lynas Corporation | Australia | 1,482 | 0.8 | |
| Trane Technologies | United States | 1,264 | 0.6 | |
| ————— | ————— | |||
| 13,492 | 6.9 | |||
| ========= | ========= | |||
| Copper | ||||
| First Quantum Minerals | Global | 3,357 | } | 2.5 |
| First Quantum Minerals 6.875% 01/03/26 | Global | 910 | ||
| First Quantum Minerals 7.5% 01/04/25 | Global | 370 | ||
| First Quantum Minerals 7.25% 01/04/23 | Global | 191 | ||
| Freeport-McMoRan | United States | 702 | 0.4 | |
| Develop Global | Australia | 415 | 0.2 | |
| ————— | ————— | |||
| 5,945 | 3.1 | |||
| ========= | ========= | |||
| Steel | ||||
| ArcelorMittal | Global | 2,675 | } | 1.9 |
| ArcelorMittal 5.5% 18/05/23 | Global | 972 | ||
| Steel Dynamics | United States | 1,749 | 0.9 | |
| ————— | ————— | |||
| 5,396 | 2.8 | |||
| ========= | ========= | |||
| Aluminium | ||||
| Norsk Hydro | Global | 2,537 | 1.3 | |
| Alcoa Corp | Global | 1,249 | 0.6 | |
| ————— | ————— | |||
| 3,786 | 1.9 | |||
| ========= | ========= | |||
| Gold | ||||
| Wheaton Precious Metals | Global | 1,365 | 0.7 | |
| Newcrest Mining | Australia | 1,232 | 0.6 | |
| Newmont Corporation | Global | 1,149 | 0.6 | |
| ————— | ————— | |||
| 3,746 | 1.9 | |||
| ========= | ========= | |||
| Nickel | ||||
| Nickel Mines | Australia | 1,759 | 0.9 | |
| ————— | ————— | |||
| 1,759 | 0.9 | |||
| ========= | ========= | |||
| Diamonds | ||||
| Mountain Province Diamonds 8% 15/12/22 | Canada | 1,690 | 0.9 | |
| ————— | ————— | |||
| 1,690 | 0.9 | |||
| ========= | ========= | |||
| Iron | ||||
| Labrador Iron Ore | Canada | 1,194 | 0.6 | |
| ————— | ————— | |||
| 1,194 | 0.6 | |||
| ========= | ========= | |||
| Total Mining | 73,835 | 37.9 | ||
| ========= | ========= | |||
| Energy Transition | ||||
| Electrification | ||||
| RWE | Germany | 4,749 | 2.4 | |
| EDP Renováveis | Global | 4,013 | 2.1 | |
| Enel | Global | 2,708 | 1.4 | |
| NextEra Energy | United States | 2,064 | 1.1 | |
| ————— | ————— | |||
| 13,534 | 7.0 | |||
| ========= | ========= | |||
| Energy Efficiency | ||||
| Schneider Electric | Global | 2,693 | 1.4 | |
| Analog Devices | Global | 2,482 | 1.3 | |
| Ingersoll-Rand | United States | 2,467 | 1.3 | |
| Kingspan Group | Ireland | 1,304 | 0.7 | |
| Soitec | France | 1,112 | 0.6 | |
| Texas Instruments | Global | 978 | 0.5 | |
| Renew Energy Global | India | 941 | 0.5 | |
| ————— | ————— | |||
| 11,977 | 6.3 | |||
| ========= | ========= | |||
| Transport | ||||
| Samsung SDI | Global | 4,767 | 2.4 | |
| Infineon Technologies | Germany | 3,441 | 1.8 | |
| General Motors | United States | 1,079 | 0.5 | |
| ————— | ————— | |||
| 9,287 | 4.7 | |||
| ========= | ========= | |||
| Renewables | ||||
| Vestas Wind | Global | 3,569 | 1.8 | |
| First Solar | Global | 1,401 | 0.7 | |
| Sunnova Energy International | United States | 1,116 | 0.6 | |
| Scatec ASA | Global | 73 | – | |
| ————— | ————— | |||
| 6,159 | 3.1 | |||
| ========= | ========= | |||
| Total Energy Transition | 40,957 | 21.1 | ||
| ========= | ========= | |||
| Total Portfolio | 194,737 | 100.0 | ||
| ========= | ========= | |||
| Comprising: | ||||
| Equity and debt investments | 194,755 | 100.0 | ||
| Derivative financial instruments – written options | (18) | – | ||
| ————— | ————— | |||
| 194,737 | 100.0 | |||
| ========= | ========= |
* The investment in Gazprom ADR has been valued at a nominal value of $0.01 as the Depositary Receipts of Russian companies have been suspended from trading.
** The investment in the Vale debenture is illiquid and has been valued using secondary market pricing information provided by the Brazilian Financial and Capital Markets Association (ANBIMA).
All investments are ordinary shares unless otherwise stated. The total number of holdings (including options) at 31 May 2022 was 77 (30 November 2021: 68).
There was one open option as at 31 May 2022 (30 November 2021: none).
The equity and fixed income investment total of £194,755,000 (30 November 2021: £127,784,000) above before the deduction of the negative option valuations of £18,000 (30 November 2021: £nil) represents the Group’s total investments held at fair value as reflected in the Consolidated Statement of Financial Position. The table above excludes cash and gearing; the level of the Group’s gearing may be determined with reference to the bank overdraft of £21,362,000 and cash and cash equivalents of £6,567,000 that are also disclosed in the Consolidated Statement of Financial Position. Details of the AIC methodology for calculating gearing are given in the Glossary included within the Half Yearly Financial Report (which can be found on the Company’s website at www.blackrock.com/uk/beri).
As at 31 May 2022, Blackrock Energy and Resources Income Trust did not hold any equity interests comprising more than 3% of any company’s share capital.
