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?
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
“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
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
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.
is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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