Fund man­ager Q&A: In­vest­ing in en­ergy sec­tor funds

The Oklahoman (Sunday) - - BUSINESS - BY ALEX VEIGA AP Busi­ness Writer

In­vestors who own en­ergy stocks have seen more than their share of swings in re­cent years.

After a two-year slide, the sec­tor re­bounded in 2016 as crude oil prices sta­bi­lized above $50 a bar­rel to lead all other sec­tors in the Stan­dard & Poor's 500 in­dex.

But so far this year, the sec­tor is the S&P 500's big­gest de­cliner, down 17.1 per­cent.

The slump comes as the price of U.S. crude oil has de­clined nearly 10 per­cent this year to $48.41 a bar­rel. Just three years ago, it topped $100 a bar­rel.

While en­ergy com­pa­nies in the S&P 500 ceased be­ing a drag on the in­dex's over­all earn­ings this year, many in­vestors re­main weary over an oil supply glut that con­tin­ues weigh­ing down crude prices.

Even so, Derek Rolling­son, port­fo­lio man­ager for the ICON En­ergy Fund, makes the case for in­vest­ing in en­ergy stocks, not­ing that com­pa­nies are be­com­ing more ef­fi­cient and stand to ben­e­fit from de­vel­op­ing coun­tries' grow­ing en­ergy needs.

An­swers have been edited for length and clar­ity:

Q: How should in­vestors think about the per­for­mance of an en­ergy sec­tor fund like yours, given the turbulent swings in the sec­tor we've seen in re­cent years?

A: The past few years have been tough as an en­ergy fund man­ager. For­tu­nately, as an ac­tive man­ager, I have be­ing able to ad­just the port­fo­lio to help re­duce the volatil­ity of the ICON En­ergy Fund. When you com­pare our per­for­mance rel­a­tive to our peers it shows that his­tor­i­cally we have been able to mod­er­ate that volatil­ity. How­ever, go­ing for­ward the bottom line is that past tur­bu­lence has made en­ergy com­pa­nies bet­ter and leaner and I'm ex­cited about the op­por­tu­ni­ties that are cur­rently avail­able in the en­ergy sec­tor.

Q: Is it your sense that a global oil supply glut is what's pri­mar­ily weigh­ing on en­ergy stocks?

A: Pric­ing me­chan­ics in oil, since mid-2014, have been fo­cused on supply ex­ceed­ing de­mand, which led to a buildup in oil in­ven­to­ries. Re­cently, how­ever, that has be­gun to change. Re­cent data has showed in­ven­to­ries de­clin­ing. If this trend con­tin­ues again, it is another pos­i­tive for both oil pric­ing and en­ergy stocks.

Q: Do oil prices have to climb fur­ther be­fore shares in en­ergy sec­tor com­pa­nies re­cover from their steep slump?

A: While higher com­mod­ity pric­ing would be an ob­vi­ous boon for en­ergy stocks, in­vestors should not un­der­es­ti­mate the power of higher pro­duc­tion in a lower mar­gin en­vi­ron­ment as a good path to im­proved earn­ings. I have heard this re­ferred to in the en­ergy sec­tor as the "New Abun­dant," where lower mar­gins can be off­set by in­creased vol­ume.

Q: For in­vestors weigh­ing whether to buy into an en­ergy stocks fund, would you say the steep pull­back in the sec­tor this year represents a good value or should in­vestors hold off un­til oil prices re­bound, the supply glut eases or some other cat­a­lyst?

A: If in­vestors wait for the news to be much bet­ter for the en­ergy sec­tor, there is a chance that they will miss the ini­tial bump in sec­tor. The im­prove­ment in the earn­ings and an­tic­i­pated earn­ings growth in the en­ergy sec­tor, es­pe­cially in the ex­plo­ration and pro­duc­tion in­dus­try, al­ready shows the im­prov­ing eco­nomics within the sec­tor. I believe the lack of en­ergy stock price re­sponse has pre­sented in­vestors with an en­try point into en­ergy. Earn­ings and rev­enue growth cou­pled with de­clin­ing in­ven­to­ries and im­prov­ing global eco­nomic con­di­tions equate to a good op­por­tu­nity to es­tab­lish a po­si­tion in en­ergy.

Q: What's your out­look on de­vel­op­ing economies in­creas­ing their de­mand for oil in the next few years?

A: Emerging mar­kets have shown no­table im­prove­ment over the last year or so. This has been re­flected in their strong stock per­for­mance year to date. Growth in these de­vel­op­ing mar­kets is key to growth in en­ergy de­mand. A fo­cus on in­creas­ing de­mand in­creases the op­ti­mism for oil pric­ing and is yet another strong ar­gu­ment for estab­lish­ing a long-term po­si­tion in the en­ergy sec­tor.

Derek Rolling­son

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