‘If I don’t believe 100% in the management, forget it’

Dynamic Funds’ energy guru has a wealth of experience and believes it's vital oil firms provide shareholder returns

‘If I don’t believe 100% in the management, forget it’

Jennifer Stevenson has seen most things in the oil patch but, after nearly three decades in the sector, can’t believe how persecuted those working in the industry feel.

She playfully suggested to WP the idea of a hydrocarbon dial, which she could turn down when the mood takes her to remind the public how much of their life is dependent on the energy source.

“For people who don’t understand how much of their life is impacted by having hydrocarbon components, I could just dial them down and see how they liked it. They’d lose the asphalt shingles on their roof, and then their smartphone, their aluminum water bottles, shoes … it would be fun!”

For Calgary-based Stevenson, the appeal of the sector was instant after working at Amoco and Petro-Canada in between studies at the University of Calgary and the University of Alberta.

She has gone on to become a significant figure in the industry and is currently VP and portfolio manager, energy at Dynamic Funds. She previously worked for more than 10 years in energy investment banking and has held senior positions with Dundee Securities, Merrill Lynch/Midland Walwyn Capital and FirstEnergy Capital Corp.

She said: “It’s a simple business financially because you make something and sell it for cash. It’s geology you can understand and it’s an economy you can see being applied to the business – you get to know the people that run the company and who you can trust and you can’t. Being in Calgary was the place to do that, obviously.”

The lazy stereotype is of the oil patch being an old boys’ club where deals are struck on golf courses or over a Scotch but Stevenson said the politics and gender equality had moved on by the time she was making her way in the industry.

In the early 1990s, at the beginning of the small-cap, public energy company market when the majors were selling assets to streamline portfolios, Stevenson worked at Merrill Lynch and was often the Calgary representative on the large-cap accounts.

She said: “It didn’t matter whether you were a guy or a girl, you were just the low ‘man’ on the totem pole because those management teams at that time, which was a long time ago, needed to deal with these big ol’ boys from New York or Toronto.

“But this new generation, all about 8-10 years older than me, they didn’t care [that I was a woman]. They wanted someone who was good at their job, gave them honest advice and delivered what they said they were going to do. They didn’t care – black, red, green, purple, boys, girls - and it never felt there was an issue.

“What freaks me out once in a while now is I’ll walk into a meeting and there’ll be more women than men and I’ll think I’m in the wrong room!”

Central to Stevenson’s love of the industry is making decisions about who you can trust and who runs a good business. It’s what Dynamic referred to as “rich, on-the-ground experience” when they hired her back in 2010. Knowing and assessing the people running energy businesses is central to how she manages money.

“Before I even dig in to things like asset quality, cash flow stability, it’s all about who runs the business and who are the stewards of capital we are entrusting when we make an investment.

“If I don’t have 100% confidence in the quality and direction of the management team, forget it because I’ve seen too many times really great management teams turn around assets that other people say are weak and make them into a very successful investment. The reverse is also true; when you get guys – and I use that term in the broad sense – who have fantastic assets but aren’t as high quality and blow it up.”

A renewed emphasis on shareholder returns has put more scrutiny on the efficiency of some companies and Stevenson admitted that oil and gas businesses have a great track record of “destroying capital”. She described as horrendous the tendency of firms to want to grow more as prices go up and profitability goes down and welcomed the fact they are being held to account for returns.

Energy companies who have the ability to put cash back in the pockets of shareholders fit Stevenson’s model. She explained: "I like to focus on companies that have really good balance sheets so we aren’t worried about commodity price volatility having an impact. The assets are robust at prices that are not sustainable.

“[They must] produce free cash flow after they have paid all your sustainable capital, which is what you need to spend to keep the production flat or even be a little more aggressive and keep it growing at 5-10% a year.

“So we have assets that are high quality enough, predictable enough, the inventory is deep enough and we spend the capital to keep it flat or grow at 5-10%, and we still have cash flow left over. And what do we do with that? That’s the shareholders’ return because that gives us dividend and buyback. I like companies that can do that.”

Suncor is a popular firm but with good reason, Stevenson said, because it works: “It’s a lovely free cash generator.” TC Energy and Conoco Phillips are two other examples that are focused on shareholder returns and tick her boxes for high-quality assets, free cash flow at unsustainably low oil prices and bulletproof balance sheets.

“For investors that want long-term dividend growth, they are well suited but they have to mindful of the fact that the price of those stocks can move around because we have a lot of volatility.

“While your dividends will grow and that area of your portfolio is comfortable, you need to be comfortable that this is a long-term investment. Put it in a box, shut the lid and pick your cash up every month, but know the value of what is in your box is going to move around and you have to not let that stress you out.”

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