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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Tuesday, May 10, 2016

The energy sector has certainly had a rough time ever since the November 2014 OPEC meeting when Saudi Arabia refused to cut oil production in order to stabilize falling prices. Some energy company shares lost as much as 50% of their value as prices dropped throughout 2015 and into 2016; the average return from the energy equity fund category for the year ended March 31, 2016, was a dismal -22.8%. Are things about to turn around?

The sectoral average rebounded with a strong 9.2% performance for the month of March, begging the question: Has the energy sector finally bottomed out? Is this the start of an extended upswing or a mere hiccup in the doldrums?

Chris Beer at RBC Global Asset Management in Toronto, and co-manager (with Brahm Spilfogel ) of the RBC Global Energy Fund, believes the energy market has indeed reached bottom, and that energy prices will continue to rise going forward.

The oversupply, which caused oil (and gas) prices to plummet in the first place, came primarily from dramatic growth in hydraulic fracturing (“fracking”) in the U.S., but Beer points to that source having slowed considerably over the past several months. “For 2016 to date, production is down 400,000 barrels. That’s creating a more balanced market, and with capital investment curtailed by half a trillion dollars globally, we’re setting up for some decent oil prices.

“The direction is upwards for the next couple of years,” Beer adds. “The consensus estimate for oil prices in 2016 was $42, and it’s at $44 now. We could end up the year going through $50. And the average forecast for 2017 was $50.” (Note: all prices in U.S. dollars.)

Meanwhile, Beer has been adjusting his portfolio accordingly. “Since about 2000 we’ve been underweighted in big integrated companies – the super majors – because they weren’t able to grow their production despite spending tons of cash,” says Beer. “In a nutshell, the super majors missed the last cycle.

“We have been overweighted in E&Ps [exploration and production companies], but in 2014 Total was the first super major to say that prices were going lower, and they reined in their costs,” says Beer. “Now they have the lowest production costs among the super majors, and are generating decent production growth.”

As a result, Paris-based Total SA (PAR: FP) is now the top holding in the fund, at 8.6% of fund assets, whereas three years ago the name wasn’t even in the RBC Global Energy portfolio. Right behind Total is Irving, TX-based ExxonMobil Corp. (NYSE: XOM), at 5.5% of assets.

As for the P&Es, they’re now underweighted as drilling diminishes and natural gas prices scrape bottom. “Low gas prices in North America are an issue,” says Beer. “It’s a large part of most E&P’s business, maybe 50/50 between oil and gas, and it’s not all that profitable, so service companies are going to be impacted. But we do have a big overweighting in Halliburton – they’re generating $5-$6-$7 a share, and the share price is under $40.”

Nevertheless, while although the natural gas market is troubled, with the notable exception of Houston,TX-based Halliburton Co. (NYSE: HAL), Beer feels that market is turning around too. “We think gas prices have bottomed out, and the market is more balanced now, but we still favor oil,” he says.

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

Notes and Disclaimers

© 2016 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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