value fund managers were asked about their views on oil at an investment seminar hosted by Glacier by Sanlam on 14 May. Dylan Ball, fund manager at Franklin Templeton, says that the company analysed every oil price bust since the 1970s to identify trends. “When oil as a commodity corrects, it only falls for a period of seven to nine months. It did this in all of the previous historical instances.”
The company further identified an immediate supplyside response and cuts in capital expenditure (capex). “By the end of January, early February, BP and Shell were cutting capex by some $20bn and their stock prices were going up, so we knew we were in the ballpark of pessimism that we like to go out and buy stocks in,” says Ball. The fund increased its energy weighting from 7% to 12.5%. Piet Viljoen, chairman of RECM, says that investors should forget about the oil price when trying to determine whether oil companies are a worthwhile investment. “Not one fund manager, including myself, saw the price decline coming, so why would you want to listen to people forecasting what’s going to happen?”
Viljoen argued that the low oil price will have minor ramifications for the intrinsic value of oil companies. He says that zeroing year one and two in a present value of future cash f lows analysis has very little impact and “the share price is a lot more volatile than the actual intrinsic value of the business”. While Sanlam International’s Colin McQueen admitted to getting into oil stocks a bit early, he is bullish on the outlook for oil companies. “We thought when these scenarios of doom and gloom were very overcooked from a valuation basis,” he says. “What we’re paying for the book value of the assets, the market is at a 30-year low, absolute levels have just come off the bottom of the levels of 2008 and 2009. I think there’s a lot value there.”
While all three believe that oil stocks are a value play, Ball cautions investors to f ind companies with staying power. A historical overview of the previous four crashes indicated an 18- to 24-month normalisation period, yielding returns of between 120% and 160%. “If you are going to take advantage of the valuations in the sector, you want to pick stocks that have a balance sheet that can wait for the full 24 months,” says Ball.