Super Fund happy with oil holdings

Last March, the fund announced it would invest up to US$250 million to take part in the booming North American gas and oil industry. Photo / AP / Hasan Jamali

Retirement investor says it can ride out fluctuations, as prices drop nearly 60%.

The New Zealand Superannuation Fund says it remains comfortable with its investment in the US oil and gas industry, despite the sector coming under pressure from a near 60 per cent decline in oil prices since the middle of 2014.

In March last year, the fund announced it would invest up to US$250 million to take part in the booming North American gas and oil industry with US private equity firm KKR.

Up to US$175 million would be directed to new KKR energy private equity investments in North American natural gas exploration and production, the fund said at the time.

The remaining US$75 million would be invested with the US$2 billion KKR Energy Income and Growth Fund, which is focused on investing in the development of unconventional gas and oil resources in North America.

"We remain comfortable with the investment," the fund said.

"As a long-term investor, the NZ Super Fund has the ability to ride out and even profit from short-term market fluctuations," the fund said, adding that developments in the market might also give rise to some new opportunities within the mandate in the form of distressed investments.

The Super Fund specifically structured the bulk of the mandate to be flexible so it could respond to changing investment conditions.

Of the US$250 million total mandate size, approximately US$50 million had been invested to date across both the Energy Income and Growth Fund and the flexible mandate, it said.

The Energy Income and Growth Fund had hedging in place to protect against the risk of oil prices falling. There was also the ability to delay or stop further capital deployment into underlying investments, it said.

"As we explained when we announced the investment, US$175 million of it is flexible, meaning we have the ability to not invest the full amount if our view of the opportunity changes over time, and to change the allocation to different sectors of the broader opportunity," the fund said.

"We continue to monitor the investment and overall sector closely."

In the US, lower oil prices threaten profits from hydraulic fracturing - the new drilling method that has reinvigorated the American industry - because it is more expensive than conventional drilling.

This week, Standard & Poor's downgraded eight US oil and gas exploration and production companies after a review of the sector in light of the steep drop in oil prices.

S&P said it found liquidity to be adequate at most companies for the next 12 months but that some firms would face "material liquidity pressures" if prices did not improve.

The $25 billion New Zealand Superannuation Fund invests globally in order to help prefund New Zealanders' future retirement entitlements.

KKR, formerly known as Kohlberg Kravis Roberts, is a multinational private equity firm founded in 1976.