IN THE BACK
Getting back in the saddle
Adam Rackley of the VT Cape Wrath Focus fund uses a capital-cycle strategy , which leads him into companies that have been starved of investment
Capital-cycle investing is a counter-cyclical strategy . While most investors focus on demand , the capital-cycle method considers the supply side , typically a function of how much capital has been invested in an industry . This means allocating money to sectors that have been starved of capital , while avoiding those that have received excessive investment . We look for sectors where investment has been depressed and – despite demand growth – lengthy capital-allocation timeframes constrain supply . This translates into pricing power , which also protects against inflation .
Enquest is an oil exploration and production company focused on mature fields in Malaysia and the North Sea . Steadily falling oil prices since 2015 and a hardening ESG environment have constrained capital for new projects . Investment in enhanced oil recovery in existing fields is picking up , but this only takes the edge off natural reservoir decline rates of 8 to 15 %. Meanwhile , new fields take more than five years to get from an initial feasibility study to the point they produce oil . Enquest trades on a prospective P / E ratio of less than 2x and a free cashflow to equity yield of close to 100 %.
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