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Questor: shale oil fund has been a disaster – but a switch to clean energy will save it

·3 min read
Oil graphic
Oil graphic

In most circumstances, a 60pc loss four years after tipping a trust would force this column to admit defeat, own up to an error and advise readers to sell.

But the case of Riverstone Energy, which invests in unlisted US shale oil start-ups in the hope that they will float on the stock market or be bought by another investor, is more complicated.

Its shares now trade at 488p, well below the £12.50 at which we tipped them, but they have gained 79pc in the past 12 months, making the trust our second best performer over the past year.

After crashing when the pandemic forced economies to shut down, the oil price has risen more than fourfold, from $20 in April 2020 to more than $80 today. This spurred the comeback for Riverstone Energy, narrowing its discount to 40pc, but its fortunes are not tied solely to the price of crude.

Since Questor last wrote about the trust in 2018, the fossil fuel fund has moved into renewable energy too, something that should help boost the value of its assets and could eventually drag up its share price.

It invested $25m last year in Enviva, the world’s largest supplier of biomass fuel in the form of wood pellets, a replacement for coal in power generation. It also invested $30m this year in Samsung Ventures, a portfolio of battery tech assets that includes shares in Solid Power, a producer of rechargeable batteries for electric vehicles.

Overall, around 20pc of its portfolio is now invested in clean energy, an area that is increasingly popular with investors. Some of its best investments in the three months to Sept 30 were renewable energy-related stocks, which helped to push its net asset value up by 16pc.

GoodLeap, an American company that helps people get loans for residential solar panels, rose by 158pc, while FreeWire, which sells fast chargers, doubled in value in this period, according to Numis, the stockbroker.

Its analysts said: “It is promising to see some early successes in the recent investments. There may be some additional catalysts for better performance, with Solid Power being the target of an [acquisition] which is expected to close in the fourth quarter.”

Christopher Brown, of JP Morgan Cazenove, the broker, also voiced support for the change in investment strategy. He said: “The trust remains excellent value as the pick-up in oil prices should boost the value of its oil assets, while the new decarbonisation investments should also perform well. They will provide the catalyst for a re-rating [higher valuation] of the shares.”

Despite recent success investing outside oil assets, it is still vulnerable to swings in the oil price, while reluctance among “ethical” investors to buy fossil fuel assets could keep the discount wide.

Nick Wood of Quilter Cheviot, the wealth manager, continues to hold the fund on behalf of clients but warned that 80pc of the portfolio was still in oil assets, which made it risky.

“The trust continues to be heavily correlated to the oil price and, while it is at the early stages of a transition away from its area of expertise, there’s no denying that there are considerable challenges ahead,” he said.

The shares are cheap, but they may not be forever. With just 12 investments, a revaluation of its holdings when they are sold could lead to a sudden jump in NAV and prompt investors to buy shares, which would narrow the discount.

A catalyst for this would be a rising oil price, something Questor believes is likely. More and more investors are using environmental, social and governance (ESG) criteria, which means that there is less capital and appetite for oil companies to drill new wells.

Thanks to ESG’s effective veto on new exploration, even as demand for oil is still rising, the oil price is likely to rise, something that will increase profits at companies that extract and sell it. Hold.

Questor says: hold

Ticker: RSE

Share price at close: 488p

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.