While a three-month gain certainly does not constitute a trend,
Hoa Hong, co-manager (with Curtis Gillis) of the
Signature Global Energy Corporate Class, which posted a 12.9% return for the year ending May 31, believes the tide
has finally turned, at least for oil producers.
"We are constructive on oil,” she says. “Supply and demand is fairly
balanced now, and the excess reserves that had built up have been drawn
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. “Production capacity is down to record low levels,” she notes.
As for natural gas, Hoa is less optimistic. “We’re generally more bearish
on gas,” she says, citing among other causes the fact that so much gas is
being produced as a byproduct of oil drilling. “The 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.,” she says.
In any event, Hoa and Curtis say they continue to invest as they have done
since the fund was established in 1998. “Curtis and I have been covering
the market for the past 30 years and have been through a few cycles, so
we’ve acquired a deep understanding of the sector as well as the
companies,” says Hoa.
“We’re style-agnostic, and we look at both macro and micro factors,” Hoa
adds. “We 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’s undervalued, we still have to be sure we’ll be
well compensated for the risk we would be taking by investing.”
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’s current top holding. “We’ll make
some pretty big bets if we feel it’s warranted,” says Hoa.
One new name in the binder is Concho Resources Inc. of Midland, Texas,
which recently purchased RSP Permian, increasing the company’s exposure to
the namesake Permian Basin, a prolific oil and gas production area in Texas
and New Mexico. “Permian 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,” says Hoa.
Olev Edur is an experienced financial and business journalist and a frequent
contributor to the Fund Library.
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