It鈥檚 certainly been a tough few years for the energy sector since the oil plummet of 2014-15, but crude prices have been recovering lately, as have the returns from energy equity funds. While their cumulative 10-year average annual compound return through the end of May 2018 was a disheartening -3.3% and the 12-month return was only 5.8%, the 3-month return was a hefty 14.1%.
While a three-month gain certainly does not constitute a trend, Hoa Hong, co-manager (with Curtis Gillis) of the , which posted a 12.9% return for the year ending May 31, believes the tide has finally turned, at least for oil producers. 鈥淲e are constructive on oil,鈥� she says. 鈥淪upply and demand is fairly balanced now, and the excess reserves that had built up have been drawn down.鈥�
She noted that at the meeting of the Organization of the Petroleum Exporting Countries (Opec) on June 22, production would likely be increased, which the Opec ministers in fact agreed to do, and that this action could result in moderated prices over the short term. But she added that the energy sector has been underinvested since 2014, particularly in the case of international companies, so the effect may not be deep or prolonged. 鈥淧roduction capacity is down to record low levels,鈥� she notes.
As for natural gas, Hoa is less optimistic. 鈥淲e鈥檙e generally more bearish on gas,鈥� she says, citing among other causes the fact that so much gas is being produced as a byproduct of oil drilling. 鈥淭he associated gas from oil production is helping to depress costs, and over the next 12 to 18 months, some 45 billion cubic feet (bcf) will be starting to come on stream in the U.S.,鈥� she says.
In any event, Hoa and Curtis say they continue to invest as they have done since the fund was established in 1998. 鈥淐urtis and I have been covering the market for the past 30 years and have been through a few cycles, so we鈥檝e acquired a deep understanding of the sector as well as the companies,鈥� says Hoa.
鈥淲e鈥檙e style-agnostic, and we look at both macro and micro factors,鈥� Hoa adds. 鈥淲e look at the fundamentals of supply and demand, and we study the companies deeply. We try to understand the management team, we look at the balance sheet, especially the amount of liquidity, and we come up with an internal valuation. If it鈥檚 undervalued, we still have to be sure we鈥檒l be well compensated for the risk we would be taking by investing.鈥�
While the fund is global in scope, this strategy has led to a portfolio that, at least for now, consists primarily of U.S. and Canadian equities (at 43% and 40% of total assets respectively). There are 40 names in all, with allocations varying from a percentage point up to 5.9% for Houston, Texas-based EOG Resources Inc., the fund鈥檚 current top holding. 鈥淲e鈥檒l make some pretty big bets if we feel it鈥檚 warranted,鈥� says Hoa.
One new name in the binder is Concho Resources Inc. of Midland, Texas, which recently purchased RSP Permian, increasing the company鈥檚 exposure to the namesake Permian Basin, a prolific oil and gas production area in Texas and New Mexico. 鈥淧ermian production was trading at a discount to Brent [a benchmark crude oil blend] because infrastructure there has not kept pace with production, but those infrastructure issues are being dealt with, so we have increased our exposure there,鈥� says Hoa.
Courtesy 漏 2018. is an experienced financial and business journalist and a frequent contributor to the Fund Library.Investments mentioned are not guaranteed and carry risk of loss.
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