Results analysis: BlackRock Energy and Resources Income

• BlackRock Energy and Resources Income (BERI) invests across the traditional energy, mining and energy transition sectors. In the financial year ending 30/11/2023, the NAV total return was -11.8% and the share price total return was -15.2%. BERI has no formal benchmark, but the backdrop was a fall of 36.4% for the S&P Global Clean Energy Index, 6.8% for the MSCI World Energy Index and 5.5% in the MSCI ACWI Select Metals & Mining Producers Ex Gold and Silver IMI Net Index.
• Dividends of 4.425p per share were paid for the year, including a higher final dividend of 1.125p per share than the board initially forecast. This was more than covered by earnings of 4.39p per share. Earnings were down 12% on the 2022 financial year as commodity prices were mostly weaker and the US dollar fell against sterling (many resource company dividends being paid in that currency). The board has raised the dividend target for the 2024 financial year to 4.5p per share, which would amount to a yield of 4.1% on the share price at the time of writing.
• BERI began the year with 21.9% invested in the energy transition companies, but ended it with 24.9%, despite sharp share price falls in the sector, as the managers took advantage of some dramatic declines in price to invest in companies they think have strong long-term fundamentals. Mining exposure fell modestly over the year, with the sector under pressure for much of it as the China reopening disappointed. Meanwhile traditional energy exposure was essentially the same at the start of the year as it was at the beginning, albeit with a shift in the underlying industry exposure.
• BERI’s shares traded consistently at a premium from January 2023 to mid-February 2023 and the board issued 1.23m shares at an average premium of 1.6%. Since 31 May 2023 the discount has widened out again, and up to 26 January 2024, the company bought back 6m shares. At the time of writing the shares trade on a 10.1% discount to NAV.
• Chairman of the Board Adrian Brown said: “The continued commitment by governments to address climate change and decarbonise the energy supply chain remains an important backdrop for the company’s three pillars of Traditional Energy, Mining and Energy Transition. The board considers that all three sectors have an important role to play as the energy system transitions to a lower carbon economy. … The Board is confident that the company remains well-placed to benefit from these key investment trends over the long term.”

Kepler View

BlackRock Energy and Resources Income’s (BERI) mandate, to invest across the traditional energy industry, energy transition and the mining industry, looks more prescient than ever. In 2020, energy transition focused mandates saw a surge in popularity, and the political commitment to reducing fossil fuel emissions has been reaffirmed by the COP meetings since. However, renewables and ESG-focussed funds have seen outflows over the past year or so, with at least one reason likely to be a fall in valuations as investors have accepted that the transition will take time, and fossil fuels will continue to play an important part in our energy mix for some time to come. BERI’s portfolio is designed to be able to take opportunities in both sides, with the managers able to react to valuations and take advantage of inefficiencies in markets. Thomas Holl and Mark Hume have been adept at shifting the portfolio between the three areas, and their increased allocation to the energy transition stocks indicates they now see the potential for another leg of strong performance now that the froth has come out of this part of the market.

Whilst the team accept the coming year will not be easy given the geopolitical and macroeconomic uncertainty, the policy backdrop remains very supportive, with a tripling in renewables capacity by 2030 agreed at COP28 which will necessitate major investment into electricity grids. This will require supply of a number of materials produced by the mining sector. In our view this is an exciting long-term trend to have exposure to in a portfolio, and BERI offers a balanced and risk-conscious way to achieve this.

Mining is a highly cyclical and volatile industry, and BERI offers exposure with offsetting positions in the energy industries which have reduced the volatility of the NAV since the new strategy was adopted. One major source of demand for industrial metals is the energy transition, but another is Chinese growth. It is intriguing to note that iron ore prices rose by 30% over the financial year even as demand from the Chinese property sector was weak. It was infrastructure which took up the slack, and the managers note that this demand growth has been driven by renewable energy and energy transition infrastructure rather than the traditional projects such as roads and bridges. Meanwhile lithium, a key metal for electric vehicle batteries, fell 80%. To us, this highlights the benefits of a broad and diversified mandate and a specialist management team who can be sensible about pricing as well as investing in likely long-term winners. Tom and Mark argue the long-term outlook for lithium remains strong, although it may take some time before the conditions emerge for prices to rally again.

Beyond the growth potential in the portfolio, BERI offers an attractive yield which should help deliver a steadier return profile. This yield was fully covered in 2023, while the trust has over a year’s dividends in reserves. With the trust trading on a double-digit discount to NAV, we think it looks an attractive and balanced way to get access to a mega-trend with a long runway ahead of it.

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