Investor watches for signs of oil’s return
As a portfolio manager focused on the global resource market, RBC Global Asset Management’s Chris Beer spends a lot of time on the fundamental outlook for oil prices.
Recent data showed three million jobs were added in the U. S. in 2014 — the first time that’s happened since 1995 — and Beer noted this economic strength is driving the U. S. dollar higher, but hurting commodities, as they typically have an inverse relationship with the greenback.
Since currency moves tend to occur in five- to seven- year cycles, he figures there are at least a couple more years left in the U. S. dollar rally.
Yet, he thinks the resulting negative impact on resources should end when interest rates actually start to rise.
“The view then is that the global economy is stronger, so you start to get later- cycle moves in commodities, particularly the bulk commodities such as base metals and oil,” Beer said.
Beer and his team manage approximately $ 1.7 billion in funds and institutional accounts, plus a similar amount as part of other mandates. The portfolios include the RBC Resources Fund, RBC Global Energy Fund and RBC Precious Metals Fund.
Most resource mandates generally have a benchmark energy weighting in the 60 per cent range, but RBC’s team doesn’t tend to make big sub- sector bets and its energy weighting is currently around 50 per cent.
Oil has been crushed lately, partly because the first quarter is generally the weakest in terms of global demand, but also because oil inventory levels are rising since supplies continue to come onto the market from new wells drilled when prices were higher.
But Beer thinks most commodities, including oil, are in good demand these days. Although most people view maturing economies as having relatively inelastic demand for crude, Beer noted U. S. oil demand is actually up an extra 700,000 barrels per day since November, when prices started to slide.
If the European economy starts to improve and China’s normalizes, he believes the commodities that would benefit most are oil and gas.
“My view is that oil supply and demand are out of balance at the moment,” Beer said.
On the positive side, North American oil producers have cut capital spending by 30- 35 per cent, although the portfolio manager noted the U. S. grew production by one million barrels a day in 2014.
Two of his holdings, EOG Resources Inc. and Pioneer Natural Resources Co., contributed 100,000 barrels of that growth and both plan to keep production essentially flat in 2015.
“EOG is probably the only U. S. E& P company that can keep production flat at ( a price of ) $ 60 US ( for) WTI,” Beer said, noting both EOG and Pioneer are short- cycle oil companies.
EOG has cut its capital spending by 35 per cent this year, easy to do because its unconventional wells in plays such as the Eagle Ford only take about four days to drill at a cost of about $ 10 million and typically take two or three months to bring on production.
Other fund holdings like Canadian Natural Resources Ltd. and Suncor Energy Inc. need two years to build an oilsands project, and probably about five before they get their money back.
Nonetheless, he noted that Suncor is one of the lowest- cost operators in the oilsands, while EOG is likely the lowest- cost producer among the shorter- cycle names.
Beer and his team have exposure to other areas as well. In the past two years, they have boosted their positions in regional commodities such as plastics and chemicals, and currently own some packaging and forest products companies.
His overweight in chemicals and fertilizers is partly because they have historically benefited from a strong U. S. dollar, as do packaging and forest product companies.
Canadian forest product companies are also capitalizing on stronger U. S. homebuilding and demand from both China and Japan.
“We would expect lumber to start digging in here and probably rise over the next year,” Beer said.
In the precious metals space, the manager’s largest weights tend to be in lower- cost companies with strong balance sheets and growing production. This includes Agnico Eagle Mines Ltd., which has about 60 per cent of its operations in Canada, and Goldcorp. Inc., which is likely around 40 per cent.
Since their costs are in Canadian dollar and they’re selling in U. S. dollars, he estimates currency moves and oil’s price decline probably save these miners $ 150-$ 200 an ounce, which is almost a 10 per cent margin increase.