Natural Gas Stocks Benefit from Obama Victory: Long Term Trends Lining Up for Sustained Value Increase According to this Experienced Energy Sector Portfolio Manager



67 WALL STREET, New York - November 7, 2012 - The Wall Street Transcript has just published its Investing Strategies Report offering a timely review of the market for serious investors and industry executives. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Socially Responsible Investing - Value Investing - Small-Cap Investing - Evidence-Based Investing - Risk Management - Downside Protection

Companies include: China Petroleum & Chemical Cor (SNP), PetroChina Co. Ltd. (PTR), CNOOC Ltd. (CEO), Valero Energy Corp. (VLO), Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), BP plc (BP), Enersis S.A. (ENI), Total SA (TOT), Helix Energy Solutions Group, (HLX), Peabody Energy Corp. (BTU), Cameco Corp. (CCJ)

In the following excerpt from the Investing Strategies Report, an experienced portfolio manager discusses the outlook for the Oil and Gas sector for buy side investors:

TWST: So where is the macro telling you to look right now?

Mr Guinness: I've run this fund for 13 years, and as I look back, I can see definite phases. From 1999 to 2000, the big deal was the oil prices recovering from being oversold. The place to be was the service stocks, which had got completely crushed, and some of the independent oil companies. Not in the super-majors and the big integrated stocks.

And then from 2000 to 2003, the world was much much more difficult. And basically, the name of the game was to spread your investment capital around. The oil price was gyrating, gas prices similarly, markets were falling, tumbling and so on. We sold most of our service stocks and retreated into good value, midcap integrated and exploration and product companies.

And then from 2003 to 2008, powerful trends began to re-establish themselves, most notably a strongly rising oil price, followed later by a rising natural gas price. Quite early on we went into oil sands and emerging market large caps, both of which did well for us. We later switched the fund at one stage quite heavily toward gassy E&Ps, and toward the end of the phase, we had a good exposure to independent refiners exploiting a boom in their margins in 2006 and 2007 - for example, companies like Valero (VLO).

Then in 2008, we saw a classic price spike in the oil price. We worried what would come next. We had done extremely well out of holding stocks that were commodity-price sensitive, and so we decided to try and shift the portfolio into the safer large-cap integrated stocks, and we did that. And we actually broke one of my portfolio construction rules, again. Instead of having each unit at 3.3% for the integrated, we basically ramped up the unit size from 3.3% to 4%. It was a risk-control mechanism.

Then from 2009 to this June, oil prices and gas prices have been quite volatile, and the name of the game has been to make tactical bets, buy stocks that are cheap, sell them when they get expensive. Recently, we have had good exposure to independent U.S. refineries. I think their strong recovery, however, is beginning to slow, and you have to be more careful now. We still have a good weighting to large-cap integrated stocks at the moment.

We also have put about 12.5% of the portfolio back into emerging markets and a similar amount into service stocks that give exposure to recovering Gulf of Mexico activity and the ramp-up in horizontal drilling and hydraulic fracturing.

In summary, about half the portfolio is in relatively stable large-cap stocks, whether integrateds, oil sands or independent refiners - your Exxons (XOM) and Chevrons (CVX), your BPs (BP) and Shells (RDS-A). We've had probably too much in the European stocks, like ENI (ENI) and Total (TOT), but they are very, very cheap now. We were very pleased that one of our oil sands stocks got taken over the other day. Nexen (NXY) was taken over by a Chinese company, giving it a 60% uplift. And we have three independent refiners who have motored.

Rather surprisingly to us, the U.S. refining industry has really turned itself around. It was beaten down by the recession, but now exports to Latin America have been surging. Also, the refiners have had a windfall because of the divergence that has emerged between WTI and Brent due to the interesting success in development of shale oil in the Eagle Ford and the Bakken basins and now the Permian basin. The Permian and the Bakken are basically feeding oil into Cushing, which is where the WTI benchmark is set. There are not enough pipelines to get these increases in supply down to the coast so WTI is depressed relative to the oil price at the coast, which tends to track Brent. Refineries that are able to access WTI are enjoying a good, albeit temporary, boost to their margins.

We are also interested in the growth in gas demand in China, which is going to be very strong over the next eight years. We believe that Chinese consumption of natural gas is going to go from 10 Bcf today to 40 Bcf a day by 2022. To put that into context, the U.S. today consumes 70 Bcf per day, so China only consumes one-seventh of what the U.S. does. Now in terms of oil, China consumes about 10 million barrels a day, which is about half the U.S. As far as coal goes, China consumes two and a half times as much coal as the U.S does.

These different proportions in China's consumption of gas, oil and coal relative to the U.S. highlight imbalances that are going to unwind. And as this happens, the amount of gas they consume will rise exponentially. It has been rising from a very low base for the last 12 years, at about 17% per annum, and that is going to continue. One of the stocks involved with this that we like is PetroChina, and we are now looking quite hard to see if there are other stocks we can invest in to benefit from this development.

Back in the U.S., we are increasing our weighting to gassy exploration and production stocks. We believe we are moving into a period where we are able to see much more clearly what is going to happen. We believe the oil price will be stable, while the gas price is going to recover over multiple years. This is going to cause a great boom for U.S. natural gas companies. They are oversold at the moment and they are going to recover very nicely over time.

There are many people who say U.S. gas is going to remain very cheap for a very long time, and they are wrong. I agree the natural gas price won't get very expensive, but it will move from being ridiculously cheap to a long run price per mcf, of, say, $6 maybe next year but more likely in 2014 or 2015. The current spot price is $3. It went as low as $2. For much of the last decade, it was trading at $8, and it went up to $12 to $14. And today, it trades in Europe at about $9; and in Asia, it's about $15. And natural gas at $6 will still be very cheap compared to oil - 40% of oil's value per BTU - energy content - if oil is $90 per barrel.

And these gassy E&P companies will grow these gas shales that they have now developed in a much more measured way than over the last five years. And as they grow steadily, demand from the electricity utility sector will grow commensurately, and likewise, gas will go on replacing oil for heating.

We're also going to see industrial demand pick up quite usefully, and I think we will see some traction from increased use for transportation, and lastly, maybe exports will begin to happen. Export of gas via LNG is a bit of a political issue, and there is a question of whether the U.S. government will allow the export of gas. We expect so, but only in moderation. But whatever the U.S. does, Canada will start exporting.

So the fund is now usefully, albeit not excessively, exposed to the recovery in U.S. gas prices, and we are also looking for ways to get more exposure to rising gas demand in China. At the same time, we are expecting to see the fund enjoy a very large recovery in the value of our oilier companies. So while there are quite a few other themes in the portfolio, that's the big picture.

TWST: Please tell us about the service stocks. What are your views on those?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.


Get stories like this on the Yahoo app and discover more every day.
Download it now.
  • European, US equities dip awaiting Fed
    European, US equities dip awaiting Fed AFP News - 14 minutes ago

    European stocks slid Thursday in choppy trade as investors eyed poor German data and recent oil price falls, on the eve of a speech by Federal Reserve boss Janet Yellen. Mid-afternoon, Frankfurt had shed 0.9 percent, London lost 0.3 percent and … More »

  • Stocks waver between small gains and losses in midday trade
    Stocks waver between small gains and losses in midday trade Associated Press - 19 minutes ago

    Stocks are wavering between gains and losses in midday trading Thursday as investors sift through a handful of earnings reports. Drug company Mylan rose, but Signet Jewelers and Dollar General fell after ... … More »

  • TABLE-INDONESIA KPB NUSANTARA PALM OIL PRICES - Aug 25 Reuters - 23 minutes ago

    Aug 25 (Reuters) - Following are Indonesian prices for crude palm oil (CPO) quoted at an auction by PT KPB Nusantara (formerly known as the state marketing centre) on Monday. Buyer Volume Price Terms (tonnes) ... … More »

  • RUBBER-Tokyo futures prices after evening session Aug 25 Reuters - 23 minutes ago

    Following are prices for Tokyo rubber futures at the end of the Tokyo market's evening session on Aug 2016. Contract Day Volume Evening Volume * Aug 161.3 5 155.0 5 * Sep 156.2 45 156.5 12 * Oct 155.3 ... … More »

  • Japan's ANA finds problem with Boeing 787 Rolls-Royce engines, cancels some flights Reuters - 30 minutes ago

    TOKYO/LONDON (Reuters) - Japanese carrier ANA Holdings needs to replace damaged compressor blades in the Rolls-Royce engines powering its Boeing 787s, it said on Thursday, forcing it to cancel some Dreamliner flights over the coming weeks. The … More »

  • German prosecutors review stolen Bosch data for VW dieselgate clues Reuters - 34 minutes ago

    Prosectors in Stuttgart, Germany are examining a trove of stolen Bosch data to see whether it contains clues about how Volkswagen cheated diesel emissions tests. "We are reviewing it to see if it is relevant," a spokesman for the Stuttgart … More »

  • Turkey sends more tanks to Syria, warns Kurdish militia
    Turkey sends more tanks to Syria, warns Kurdish militia AFP News - 38 minutes ago

    Turkey sent more tanks into Syria on Thursday and sternly warned a Kurdish militia to withdraw from frontline positions, a day after pro-Ankara Syrian opposition fighters captured a key border town from jihadists. The tanks joined those which … More »

  • In euro zone first, Finland could sell syndicated bond with negative yield Reuters - 39 minutes ago

    Finland could launch a new bond as early as next week, three banking sources said on Thursday, a deal that could mark the first euro zone sovereign syndication with a negative yield. The country is believed to be considering whether to issue a … More »

  • Markets Right Now: Stocks waver in late morning trade Associated Press - 40 minutes ago

    The latest on developments in global financial markets (all times local): 11:45 a.m. U.S. stock indexes are wavering between small gains and losses as a late summer lull on Wall Street continues. Several ... … More »

  • Asia’s Biggest Container Shipper Posts Loss After China Merger Bloomberg - 41 minutes ago

    China last year merged China Ocean Shipping Group and China Shipping Group to form China Cosco Shipping Corp. as part of the government’s efforts to shrink industries plagued by overcapacity while creating globally competitive businesses. China … More »

  • Russia to work with US on response to Syria gas attacks probe
    Russia to work with US on response to Syria gas attacks probe AFP News - 55 minutes ago

    Russia will work with the United States on a response after UN investigators found that the Syrian regime had carried out chemical attacks, Moscow's UN Ambassador Vitaly Churkin said Thursday. An investigative panel set up by the UN Security … More »

  • Hedge Funds Are Suddenly Winning on China’s Most Dangerous Short Bloomberg - 56 minutes ago

    After suffering through a 953 percent rally in shares of Yirendai Ltd. since mid-February, hedge funds and other bearish speculators were rewarded over the past four days as the Chinese peer-to-peer lender sank 35 percent in U.S. trading. Holding … More »

  • FTSE retreats as pharma stocks fall
    FTSE retreats as pharma stocks fall Reuters - 56 minutes ago

    UK shares fell on Thursday, extending losses from the previous session as healthcare stocks dropped, though CRH rose after well-received results. The blue-chip FTSE 100 index was down 0.3 percent at 6,816.90 points by the close. Healthcare stocks … More »

  • Biden warns Europe against Russian energy reliance
    Biden warns Europe against Russian energy reliance Associated Press - 1 hour 36 minutes ago

    U.S. Vice President Joe Biden says a new natural gas pipeline planned to stretch from Russia to Germany "looks like a fairly bad deal" for Europe because it increases its energy dependency on ... … More »

  • Average US 30-year mortgage rate unchanged at 3.43 percent Associated Press - 1 hour 41 minutes ago

    Long-term U.S. mortgage rates didn't budge this week, remaining at historically low levels that continue to lure prospective home buyers. Mortgage giant Freddie Mac said Thursday that the average for the ... … More »

  • Oil prices up nearly 1 percent on soft dollar, OPEC speculation
    Oil prices up nearly 1 percent on soft dollar, OPEC speculation Reuters - 1 hour 43 minutes ago

    Oil prices rose nearly 1 percent on Thursday, bouncing back from a selloff in the previous session, on expectations the dollar would weaken ahead of a key speech by U.S. Federal Reserve Chair Janet Yellen on Friday. Crude futures also saw support … More »

  • Obama administration pushing state-run retirement plans Associated Press - 1 hour 45 minutes ago

    The Obama administration has finalized a new rule intended to encourage states to set up their own retirement plans. The Department of Labor rule is designed to clarify how voluntary, state-run retirement ... … More »

  • Spain revises Q2 growth estimate upward to 0.8 percent Associated Press - 1 hour 48 minutes ago

    Officials have revised Spain's quarterly economic growth figure for the April-June period upward, from 0.7 percent to 0.8 percent, welcome news for a country in its eighth month without a fully functioning ... … More »

  • Grain mixed, livestock mixed Associated Press - 1 hour 57 minutes ago

    Grain futures were mixed Thursday in early trading on the Chicago Board of Trade. Wheat for Sept. delivery was .50 cent higher at $4.0460 a bushel; Sept. corn was .50 cent lower at $3.27 bushel; Sept. ... … More »

  • Iran will join OPEC meet in Algeria: minister AFP - 2 hours 14 minutes ago

    Iran will take part in an informal meeting of OPEC countries in Algeria next month, state media reported on Thursday. "I will take part in this session," Oil Minister Bijan Zanganeh told the ... … More »

  • Deals of the day- Mergers and acquisitions Reuters - 2 hours 26 minutes ago

    ** British broadcaster ITV said on Thursday it would not bid for Entertainment One after failing to persuade the owner of the children's TV character Peppa Pig to enter into a formal process. ** Berry Plastics Group Inc said it would buy AEP … More »

  • Chinese military will train Syrian troops: govt
    Chinese military will train Syrian troops: govt AFP News - 2 hours 37 minutes ago

    China's military will provide training for Syrian armed forces, a spokesman for Beijing's defence ministry said Thursday, adding it would take place on Chinese soil. Beijing is a longstanding backer of the Syrian government of Bashar al-Assad, … More »

  • Gold edges off 4-week low, awaits clues on Fed policy
    Gold edges off 4-week low, awaits clues on Fed policy Reuters - 2 hours 44 minutes ago

    Gold edged off the previous day's four-week low on Thursday as the dollar retreated, but prices were rangebound ahead of a speech by Federal Reserve Chair Janet Yellen this week which will be watched for clues on monetary policy. Investors are … More »

  • Oil prices fall as production freeze expectation fades
    Oil prices fall as production freeze expectation fades Reuters - 2 hours 44 minutes ago

    Oil prices slipped on Thursday as the market focused on oversupply and fading expectation of a production freeze. U.S. light crude oil was down 15 cents at $46.62 a barrel, after dropping 2.8 percent on Wednesday. Oil prices rose more than 20 … More »

  • Bold moves, tepid gains: Have central banks met their limit?
    Bold moves, tepid gains: Have central banks met their limit? Associated Press - 2 hours 45 minutes ago

    The world's key central banks have worked themselves into contortions to try to rev up economic growth, raise inflation and coax consumers and businesses to borrow and spend more. They've pumped trillions ... … More »

Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
to view quotes in your portfolios.


  • Most Actives
    Most Actives
    NamePriceChange% Chg
  • % Gainers
    % Gainers
    NamePriceChange% Chg
  • % Losers
    % Losers
    NamePriceChange% Chg

Market Data

  • Currencies
    NamePriceChange% Chg
  • Commodities
    NamePriceChange% Chg
  • Bonds
    TreasuryYield (%)Yield Change