Scott Vali, vice-president and portfolio manager at Signature Global Asset Management, says he is emphasizing energy in the global resource fund for which he is responsible.
Within energy, Vali, who specializes in natural resources for Signature, favours oil producers. "The price outlook is positive," he says. "Oil is well placed to benefit from global economic growth, given the constraints in its supply around the world."
There has been much discussion, says Vali, about the adverse impact of China's slowing economic growth rate on all commodity prices. There is concern in some circles, he says, that slower emerging-markets growth means an end to the super commodity cycle. "This thinking is too simplistic," he says. "The natural-resource sector is heterogeneous and there is the need to assess the fundamentals of each commodity."
Take oil, for example. Vali says the shift in China's economy toward domestic consumption, which is reducing its reliance on exports, "is a net positive for oil as it is boosting domestic oil consumption."
A positive trend for oil producers in the United States, says Vali, is that the discount between the West Texas Intermediate price (the U.S. benchmark price for crude) and the Brent price of crude oil (an international price) has narrowed. Western Canadian oil producers are currently receiving a discount to WTI for their oil, he adds.
In contrast to his generally positive outlook for the oil price, Vali considers that North American natural-gas prices will continue to remain depressed for some time.
Turning to base metals, Vali notes that some commodities, such as aluminum and nickel, never participated in the general surge in commodity prices over the past decade.
Copper and iron ore did participate in the commodity-price ascent, he says, and "should continue to do particularly well." This reflects, says Vali, the particular fundamentals bolstering each of these two commodities.
Take iron ore, the steelmaking raw material, for example. The market is too pessimistic about the price of iron ore, says Vali. "China, a substantial producer of the commodity, is a high-cost producer, which tends to support a higher price." Also, he adds, China's iron-ore imports are quite robust.
Scott Vali | |
Concerning gold, Vali notes that the prospect of more vigorous global growth and an end to the accommodative monetary policies, particularly in the United States, is a negative for the precious metal. Still, he says, gold provides "some insurance should the central banks fail to engineer a sustained economic recovery and there is a loss of confidence in global financial markets."
Signature Global Asset Management is a separate portfolio management group under CI Investments Inc.'s umbrella. Vali's responsibilities include that of lead manager of CI Signature Global Resource and CI Signature Global Resource Corporate Class, CI Signature Global Energy Corporate Class and CI Signature Gold Corporate Class. Vali joined the Signature team in 2000 and is responsible for managing approximately $3 billion in assets across various funds.
Effective July 26 this year, Signature changed the mandates of its Canadian resource funds to global funds. "Canadian companies do have a strong presence in the global resource industry," says Vali. "But there are segments of this industry where Canadian companies are under-represented and there are also foreign-owned companies that offer relatively better opportunities than their Canadian counterparts."
At the end of August, Signature Global Resource, with 55 names, held 48.6% in Canadian-based companies, 28.4% in U.S. companies and 11% in international companies.
The energy sector represented 60.1% of the portfolio and materials 27.9%. Within energy, "a significant weighting is in U.S. unconventional plays, an area that offers both growth and value," says Vali.
Here his biggest holding is Pioneer Natural Resources Co. PXD, a large independent exploration and production company. Pioneer has "a lot of land" in the oil-producing Permian Basin. It also has its existing, successful Eagle Ford shale play, an unconventional natural-gas play. Both are in Texas. In the Permian Basin, the company has been drilling in the Wolf Camp area, where it has access to multiple zones, says Vali. "The initial results are promising and the market is underestimating the size of this resource."
An all-Canadian intermediate oil and natural-gas producer that is among the largest holdings in Signature Global Resource is Tourmaline Oil Corp. TOU. The company is focused on the Western Canadian sedimentary basin and has "good growth prospects."
Tourmaline is drilling its Alberta Deep Basin plays using a combination of conventional and unconventional techniques. Of its mid-stream interests, Tourmaline has operating control of "natural-gas processing and transportation infrastructure" in its two core areas -- the Deep Basin and the Greater Peace River High. "The stock appears to be expensive on near-term earnings and cash flow estimates," says Vali. "But the company is not getting full credit for the size of its resource."
A Canadian-based global energy player that is "undergoing a significant restructuring in order to surface value and pay down debt" is Talisman Energy Inc. TLM. This stock is held in a number of Signature funds, Vali says, including the global resource fund. The company has had "disappointing results in some of its business segments, including from its North Sea assets."
Pioneer Natural Resources Co. | Talisman Energy Inc. | Tourmaline Oil Corp. | ||
Oct. 15 close | US$199.72 | $12.52 | $39.41 | |
52-week high/low | US$202.4-US$99.75 | $13.83-$10.62 | $46.10-$29.95 | |
Market cap | US$27.7 billion | $13.0 billion | $7.4 billion | |
Total % return 1Y* | 89.4 | 0.8 | 29.6 | |
Total % return 3Y* | 39.6 | -9.4 | n/a | |
Total % return 5Y* | 48.3 | 5.0 | n/a | |
*As of Oct 15, 2012.All figures in $US Returns are in Canadian dollars unless otherwise noted. Source: Morningstar |
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Talisman's CEO Hal Kvisle has put certain of the company's assets on the block, says Vali. More recently, activist investor Carl Icahn bought a 6% stake in the company. Vali considers that Icahn's involvement in Talisman "could speed up asset sales and value realization."
Two major diversified global natural-resource companies that feature in Signature Global Resource's top 10 holdings are Rio Tinto PLC and BHP Billiton PLC. These two companies rank among the world's largest producers of iron ore, says Vali. The shares of Rio Tinto, he says, are undervalued relative to his expectations of cash-flow growth. "The bearish sentiment surrounding the iron-ore price is already factored into the valuation on the stock," he says.
In addition to iron ore, BHP Billiton also has substantial oil and coal interests, says Vali. "The stock is reasonably priced based on forward earnings-per-share estimates."
Early this year, Vali significantly reduced his holding in Teck Resources Ltd. TCK.B, which is Canada's largest diversified miner. "The company has a large percentage of its gross profits from coal and the commodity price had declined substantially."