CI’s Global Energy fund well positioned for next phase in energy cycle

CI’s Global Energy fund well positioned for next phase in energy cycle

CI’s Global Energy fund well positioned for next phase in energy cycle
By Olev Edur 

Energy stocks have been pumping out strong returns for investors lately. Fundata statistics for the period ended August 31, 2014, show that energy equity funds topped both the one-year and six-month performance rankings among all fund categories, with returns of 44.3% and 20.1% respectively. But then, the sector was aided immensely by a long and frigid North American winter plus several Mideast wars. So what happens next?

Perhaps as importantly for many Canadian energy investors, what are the longer-term prospects for our domestic industry? Given recent talk about production cutbacks and possible project cancellations, is Canadian oil doomed to languish in the ground, or continue fetching discounted rates due to transport restrictions and proliferating political/grassroots opposition?

Hoa Hong, a senior investment analyst with Signature Global Asset Management in Toronto, and part of the management team for CI Signature Global Energy Corporate Class A, agrees that last winter was abnormally beneficial to energy producers. She acknowledges that a repeat isn’t likely. “Natural gas was really helped by the cold winter,” she says. “The price went from around $3 [U.S. per million BTUs] to touching $6.

“Crude oil was helped, too, by the cold weather as well as by geopolitical events in Syria, Iraq, Libya...,” Hong adds. “The probability of another winter like that is very low, so we won’t have that tailwind over the next 12 months. It’s going to be more of a headwind.”

Shale oil now a major factor

Meanwhile, U.S. shale production has quickly become a major factor in the global oil market, with dramatic production increases putting downward pressure on prices. Nevertheless, Hong points out that the global market for oil is growing at the same time as the U.S. has been ramping up production, so the whole scenario evens out.

“The U.S. is increasing production, but other non-OPEC countries are not growing their own production, and overall global demand is growing by a million barrels per day [per year], so the supply/demand situation is pretty well balanced,” she says. “That’s why the risk premiums [on Mideast oil] have been coming down.”

As for the situation in Canada’s oilpatch, Hong acknowledges that while there have been setbacks, the transport problems are being resolved. “If you look at the last year, yes, people fled because of the bottlenecks, and the price [of Canadian crude] was subject to a big discount. The market had priced in the bottlenecks, but it’s also been pretty efficient at de-bottling.”

More to pipelines than Keystone

Hong points to the pending inauguration of Enbridge Inc.’s Flanagan South pipeline from Illinois to Oklahoma (600,000 bpd increasing to 880,000 bpd of Canadian crude), even as the much-publicized Keystone XL pipeline languishes on a legislative vine. “And the railways have been very important,” Hong adds. “They’ve gone from zero to carrying 400,000 to 500,000 thousand bpd, so the bottlenecks are being resolved, and the valuation difference [on Canadian crude] is getting smaller.”

Meanwhile, from an investment perspective, Hong notes that the proliferation of “fracking” in the U.S. has led to a corollary benefit in the form of greater choice. “There are a lot more companies producing oil now, with the resources to keep growing for multiple years,” she says, citing as an example Midland, Texas-based Concho Resources Inc. (NYSE: CXO), and its new play in the Permian Basin (largest onshore oil and gas deposit in the U.S). “This is their third time building in the Permian, so they know their asset base. They’re going to double their production in three years.”

Coping with risk

Under the leadership of Signature’s Chief Investment Officer Eric Bushell, the fund’s portfolio focuses on some of the world’s biggest and best diversified energy and oil-and-gas companies, with a couple of familiar Canadian players topping the list: Canadian Natural Resources Ltd. (TSX: CNQ) at a 4.6% weighting and Suncor Energy Inc. (TSX: SU) at 3.9%. Also in the top 10 is Houston, Texas-based oil-and-gas services giant Schlumberger NV (NYSE: SLB) with a 3.4% weighting and oil-and-gas producer Anadarko Petroleum Corp. (NYSE: APC) at 3.1%.

The fund delivered a 1-year return of 32.6% to Aug. 31, and a year-to-date return of 23.8%, topping its benchmark, the S&P/TSX Capped Energy Index Total Return Index, handily in both periods. Over 3 years, the fund produced an average annual return of 12.0%, outpacing its benchmark’s return of 7.7%. This performance comes at a cost of higher volatility, however. The fund’s 3-year annualized standard deviation is at an eye-watering 15.08. Still, that’s not unusual for this typically volatile category, and indeed, the fund places well in 3-year risk versus return performance, showing better on both counts than the median for the Energy Equity category.

Overall, while Hong doesn’t foresee another banner year for gas and oil (barring another banner winter), the long-term outlook is still positive, with greater stock selection than before, and ever-growing product demand to keep step with growing production. That applies as much to Canadian markets as well: “We’re still very bullish on heavy oil,” says Hong.

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

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