Thursday, November 26, 2015

Revealed: The one UK stock to buy to benefit from fracking in the UK

David Thorpe:

The increased political appetite for shale gas production, commonly known as fracking, offers potential significant gains for one particular FTSE 100 stock, according to Tineke Frikkee, manager of the Smith and Williamson UK Equity Income fund.

Frikkee commented that, ‘United Utilities supplies the water from the Scottish borders to the bottom of Lancashire, it is a big area, and the company has a dividend yield of 4 per cent, which is stable and predictable.’

She continued that the present low levels of interest rates and inflation mean that the company’s borrowing costs are particularly low, whilst the the prices the company charges for its products is set by the regulator, rather than by market forces, ensuring stable revenue, while costs fall.

But she noted that the volume of water consumed within the area of United Utilities operations has shrank over recent decades as those areas, which include the significant urban conurbations of Manchester and Liverpool, have seen a decline in industrial activity which has reduced the demand for water from commercial firms.

But Frikkee noted that fracking requires the use of a very significant volume of water and that the areas of the UK that are most replete with shale gas are parts of Lancashire in which United Utilities is the monopoly supplier of water.  

She noted that comments in yesterday’s Autumn Statement and also , separately from Amber Rudd, the UK secretary of state for energy, have indicated that the UK government at national level is keen for fracking to proceed, although there is opposition at local government level.  

She concluded her comments by noting that many of the largest companies on the FTSE 100 are businesses with significant overseas exposure, or exposure to commodities or oil, ‘where the earnings forecasts for next year might be too optimistic, they might underachieve them by double digits, if you are lucky. United Utilities is UK-exposed, and stable, I don’t know if the fracking will happen, but there are a lot of positives for income investors in the shares anyway.’
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