Finweek English Edition - - COVER -

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.

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