BLACKROCK ENERGY AND RESOURCES INCOME TRUST PLC

The post-Covid landscape for mining and energy

As announced on 1 June 2020, the portfolio managers of the BlackRock Energy and Resources Income Trust plc will begin the transition of the portfolio to reflect structural shifts in the energy sector, notably an increased focus on alternative and renewable energy sources. Find out more here

 


As COVID-19 restrictions are slowly lifted across the world, the world that emerges may not be the same as the one that was left behind. It is likely to accelerate changes across the mining and resources sectors that were already underway. 

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The pandemic and the measures taken to contain it have had a significant short-term impact across financial markets and the energy and mining sectors have seen an impact. However, in the longer term, we also believe the crisis may accelerate the transition away from fossil fuels, opening up structural growth opportunities across both sectors. We have positioned the BlackRock Energy and Resources Income Trust to take advantage of this.

Demand for oil has shrunk by 9% in the wake of the lockdown measures, only the third time in the past 35 years in which oil demand has contracted1. We hold a number of high-quality oil companies in the Trust and believe that these short-term difficulties mask longer-term opportunities. First, these companies entered this crisis in a good position with strong balance sheets, advantaged assets and capable management teams. In any oil sector shake-out, they should be in a robust position.

Changing business models

At the same time, many are changing their business models to become less dependent on oil. Royal Dutch Shell has developed wind and solar-power projects, encouraged the adoption of hydrogen electric energy and has invested in low-carbon start-ups — spanning electric vehicle charging to home energy storage2. Earlier this year, Rio Tinto announced plans to invest around $1 billion over the next five years to support the delivery of its climate change targets3. It is also working towards net zero emissions from operations by 20503.

We believe the recent slide in oil demand may accelerate this adoption of alternative energy sources and also see weaker companies leave the market. Ultimately, while there will undoubtedly be short-term volatility, it may help create a more sustainable future for the larger oil companies. Sustainability and good governance have long been important criteria for the Trust, and we want to support their transition.

Quotation start

Sustainability and good governance have long been important criteria for the Trust, and we want to support their transition.

Quotation end

The energy transition

The BlackRock Energy and Resources Income Trust moved to incorporate more companies directly linked to the global energy transition in its portfolio mix last year. These companies have proved resilient during the crisis. We believe investors have seen the strength of the growth story: the most recent data from the International Energy Agency shows that while around a quarter of the world’s electricity is powered by renewables, capacity is expected to expand by 50% by 20244.

Equally, in the longer term, the crisis is likely to accelerate demand for clean air, lower pollution and more sustainable energy sources. New less travel-intensive work patterns are likely to emerge. Demand for electric cars and other forms of low-pollution transport may increase and governments are making cuts to emissions part of the conditions for bail-out finance. As the energy transition becomes more established, we believe it will continue to create structural growth opportunities for the Trust and continue to look at a range of new opportunities.

Mining renewal

This is also true for the mining sector. Mining companies have sold off in recent weeks in anticipation of a lower level of global economic growth in 2020, but global stimulus measures on infrastructure and carbon transition are likely to be commodity intensive. We believe investors often forget that areas such as electric car batteries are dependent on mined materials. This is another area of potential growth for the Trust over the next few years.

The balance sheets of mining companies in the portfolio continue to be in strong shape and companies remain focused on capital discipline. Mining companies are therefore well positioned to continue to generate robust free cash flow and return capital to shareholders through dividends and buybacks. In a low-income environment this could be a catalyst for a rerating and will also be a support for the Trust’s income, which is an important part of our mandate.

The energy and resources sectors are seeing exciting developments, which are likely to accelerate through this crisis. We have positioned the Trust firmly in line with this new future.

Risk: The specific companies identified and described above do not represent all of the companies purchased or sold, and no assumptions should be made that the companies identified and discussed were or will be profitable.

Unless otherwise stated all data is sourced from BlackRock as at May 2020. All amounts given in USD.