Libyan pain, oilsands gain

Uprisings highlight value of production in stable countries, Invesco Trimark's Norman MacDonald says

Sonita Horvitch 2 March, 2011 | 7:00PM
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Norman MacDonald, a vice-president and portfolio manager at Invesco Trimark Ltd. who specializes in resource stocks, says that the uprising in Libya and its upward pressure on oil prices underscores the tightness in the supply of oil globally.

"There is concern, not only about supply disruption as a result of the unrest in the region, but also about the possible disruption of key supply routes, such as the Suez Canal and the Strait of Hormuz."

MacDonald notes that the popular uprisings in important oil-producing nations in North Africa and the Middle East highlight the value of energy resources in politically stable countries such as Canada and the United States. "This will be good, for example, for Canadian oil-sands producers."

But, MacDonald adds, it could hurt those global Canadian resource companies with operations in countries, where there is "political uncertainty." From a macroeconomic perspective, there is "a concern that rising oil prices will dampen global GDP growth prospects, which will, in turn, ultimately reduce the demand for oil."

In the meantime, Saudi Arabia, a leading member of the Organization of Petroleum Exporting Countries (OPEC), has increased production to help compensate for supply disruption in Libya. "But what if the unrest spreads to this major oil producer?"

In all, MacDonald's call is that it is unlikely that the West Texas Intermediate (WTI) crude-oil price, which spiked recently to close to US$100 per barrel, will remain at these levels over the longer term. "I think that the sustainable level is between US$70 and US$80 per barrel."

At Invesco Trimark, MacDonald is responsible for Trimark Resources, which had assets of $548 million at the end of January, and for Trimark Energy Class, which was launched in January.

Norman MacDonald

Of the new energy fund, MacDonald says: "There is a whole gamut of energy companies beside traditional oil and gas producers, for example, in the field of alternative energy and in energy services. There is therefore sufficient scope for a diversified fund focused on energy."

Trimark Resources, which holds 42 names, has some 39% in oil and gas companies (with some 22% in oil and 17% in natural gas) and 10% in oil and gas services companies. In the materials sector, the fund holds 18% in gold companies and 12% in base-metal producers, including uranium miners.

A value manager, MacDonald's discipline is to buy companies with good assets and good management at a substantial discount to his estimated value of the business or resource.

One of the top 10 holdings in Trimark Resources is Nexen Inc. NXY.

Nexen has interests in the Athabasca oil sands, North Sea, Gulf of Mexico, offshore West Africa and Yemen. "About 10% of Nexen's net asset value can be attributed to its operations in Yemen, where there is some political uncertainty," says MacDonald. "But countering this is the rise in oil prices, which is particularly benefitting its production offshore U.K. in the North Sea."

A U.S.-based energy producer that MacDonald has been adding to is Devon Energy Corp. DVN, which is held in both funds. MacDonald says Devon is a well managed company under the leadership of CEO John Richels.

"The company is good at capital allocation," MacDonald says. He notes that Devon sold a number of its assets in 2010 including its holdings in the Gulf of Mexico, Azerbaijan and China and "good prices." It is concentrating on its onshore natural-gas production, balanced with a good portfolio of SAGD (steam-assisted gravity drainage) oil-sands projects in western Canada.

Devon's Jackfish Projects, located near Conklin, Alta., are proceeding well, says MacDonald. "Construction on a new phase of expansion, called J3, is expected to begin towards the end of this year, with plant start-up targeted for 2015." The market's valuation of the company is such, he says, "that you are getting Devon's natural-gas business at a reasonable price."

MacDonald has been taking profits in U.S.-based Frontier Oil Corp. FTO, though it remains at top 10 holding in both funds. Frontier Oil is an independent oil refining and marketing company with refineries located in Wyoming and Kansas. Its primary products are gasoline and diesel.

Frontier Oil, says MacDonald, is able to take advantage of the ample supply of West Texas Intermediate crude, "which has a lower price than Brent crude oil, including oil from the North Sea, which is more globally accessed." The emergence of new oil-shale plays in the United States "is increasing the supply of crude south of the border."

Turning to the materials sector, MacDonald says that he is cautious on base metals, but optimistic about precious-metals producers. He says Torex Gold Resources Inc. TXG, which owns the Morelos Gold Project, a gold-exploration property southwest of Mexico City, has "excellent prospects." The project was owned by Teck Resources Ltd., "which did little with the property before it was sold in 2009."

In a short time, Torex has undertaken an "extensive amount of exploration drilling and the initial results are promising," says MacDonald. "The pre-feasibility should further delineate the resource potential." The project has three million ounces measured and indicated. But the company could, he says, prove up another one million ounces on the site, which would produce a net asset value per share of $3."

MacDonald is impressed with Torex's leadership, which he considers to be a considerable plus for the company. "Torex CEO Fred Stanford is a conservative manager who has had extensive experience in the mining business."

MacDonald has reduced his holding in another precious-metals stock, Silver Wheaton Corp. SLW. In exchange for an upfront payment, Silver Wheaton has the right to purchase the silver production, at low fixed costs, from quality mines.

"The company has benefitted from the run-up in the price of silver," says MacDonald. The stock has risen sharply and "its multiple relative to cash flow and earnings, makes it less attractive to a value manager."

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Sonita Horvitch

Sonita Horvitch  

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