Over the past few months, Robert Lyon, lead manager of CI Signature Global Energy Corporate Class, has been reducing his cash position and riding the recent rebound in energy stocks.
In the year to date to June 30, the fund has returned 14.7%, slightly below the median 16% in the Energy Equity category. Nearly all of the gains have come in the most recent quarter.
This has provided welcome relief for investors in a fund category that, amid a severe industry slump, has sustained a median average annual loss of 21.8% over the past two years.
During that same two-year period, the CI fund fared somewhat better, with an annualized 18% loss. "We were sitting through most of the downturn at about 22% cash, so that helped mitigate our downside." says Lyon, a senior vice-president and portfolio manager at CI Investments Inc. in Toronto.
Currently, Lyon is working with a cash position that's down to about 10%. "Going back a few months, some quality stocks were coming down to a price range that we found more attractive." Some companies, he adds, used the downturn to make improvements to their business operations, and the rebound in the oil price has helped the industry as a whole. At a recent US$45 a barrel for West Texas Intermediate crude, the price of oil is up roughly US$8 since the start of this year.
Lyon's overall investment discipline is growth at a reasonable price (GARP). He favours oil and gas companies that are low-cost producers, maintain strong balance sheets and have attractive valuations.
One such stock position that Lyon added to, and is now among the fund's top 10 holdings, is a prominent large-cap name: Suncor Energy Inc. (SU). "The number-one thing they did at the absolute bottom of the market," says Lyon, "was they bought out Canadian Oil Sands Ltd., the largest synthetic crude-oil operation."
Suncor was also better able to weather the downturn by being a diversified, integrated company with upgrading and refining operations. "Those refining operations were massively profitable during this oil-price downturn when the demand for gasoline stayed very strong," says Lyon. Suncor's cash flows stayed significantly stronger than most non-integrated companies. "That's a company that ties in perfectly to our investment strategy and style."
Another position that Lyon has added to is Raging River Exploration Inc. (RRX). "I define this as a small-cap company," he says, "with a very strong management team. They had one of the strongest balance sheets going into the downturn, as well as one of the lowest-cost oil plays in Canada."
Lyon adds that the management of Raging River, like Suncor, has been able to take advantage of the company's strong financial position and make some acquisitions. This was at a time "when other companies had to sell assets at the bottom of the market."
Geographically, the CI fund currently has an approximately 42% weight in Canadian equities and 36% in U.S. equities. The portfolio is geographically indifferent, says Lyon, and the weightings by country reflect the best opportunities available that meet his investment criteria. If the best opportunities happened to be all in Canada, the fund's holdings would all be Canadian companies, Lyon adds.
The biggest change in the universe of publicly traded energy equities over the past decade, says Lyon, has been the expansion of shale plays and horizontal drilling. As the shale plays and technology unfolded over the past 10 years, "the number of quality companies in the U.S. has really exploded."
Lyon characterizes the overall global demand for oil as having been very strong. "In fact, in 2015, when we got most of the price drop," he says, "it was one of the biggest global demand-growth years that we've seen in 10 years." With the drop in the price of oil, U.S. growth took off and European growth also picked up, adds Lyon.
The growth slowdown in China, widely believed to be a big reason for slump in energy prices, isn't a cause for concern, according to Lyon. In the last couple of years, he says, China's oil demand has grown at about 5%, so it's still contributing to the growth in global demand.
Looking ahead, Lyon expects that the next big move in oil prices will be sharply higher. "We believe oil's going up to US$60 to US$65 over the next 12 months or so," he says. "As well, our view for natural gas is not dissimilar to oil. We think the price is going up from here."
However, Lyon added, the prices of many energy stocks already reflect expectations of rising prices. "So the challenge and the opportunity now are to find those individual stocks that stand up either for growth reasons, or from doing something in their own right that's creating opportunities."