BGR: Uncertain Energy Price Environment, But The Fund Should Be Well-Positioned

2025-03-05 07:06:37 ET

Summary

• The BlackRock Energy & Resources Trust offers high current income and exposure to the traditional energy sector, outperforming during market declines but underperforming in strong markets.
• The fund's covered call strategy boosts income but caps upside potential, making it ideal for income-focused investors seeking stability over high growth.
• The current regulatory environment under President Trump is favorable for traditional energy, potentially benefiting midstream companies and LNG producers.
• The trajectory of oil prices remains uncertain, as growing domestic production could push prices downward.
• The fund's 8.85% yield and low expense ratio make it attractive, but it trades at a smaller discount compared to its long-term average valuation.

The BlackRock Energy & Resources Trust ( BGR ) is a closed-end fund that investors can purchase as a method of gaining exposure to the traditional energy sector along with a very high level of current income. This sector has gotten an increasing amount of attention from investors over the past few years as energy prices have trended higher than many Americans have become accustomed to, and many traditional energy companies have delivered outsized returns. We can see this very quickly by looking at the performance of the iShares U.S. Energy ETF ( IYE ), which tracks the Russell 1000 Energy RIC 22.5/45 Capped Gross Index. As we can see here, over the past five years, this index has substantially outperformed the S&P 500 Index ( SP500 ):

It is worth noting that the traditional energy sector has not suffered from many of the problems that have plagued the green energy sector over the past few years due at least in part to the fact that most oil and gas companies have been able to make their operations cash flow positive and have not been dependent on the market to provide financing. This has insulated them somewhat from the increase in interest rates that also occurred over the same period. As I have pointed out in various previous articles, many renewable energy companies have been unable to achieve positive free cash flow from their operations and have thus struggled to achieve profitability in an environment in which money is not free. We can see this in the collapse of the "green" energy industry beginning in late 2021 when interest rates started to rise:

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