Kristina Cooke: Top investors expect to be in black as oil rebounds

Published on Saturday 13 December 2008 13:02

ENERGY shares are hot again. After plummeting about 40% in the second half of this year, they look attractively priced to some of the biggest investors as they position themselves for 2009.

While the precipitous drop in crude oil and natural gas prices from their record highs in July have pounded the sector, money managers are betting oil will inevitably rebound. That's because as demand is falling amid a global slump, production cuts mean supply is falling faster. Once the economy begins to stabilise, demand will return with a vengeance, they say.

"We very rarely invest in energy… but I think there are some great opportunities," Whitney Tilson, founder of hedge fund T2 Partners, told the Reuters Investment Outlook Summit in New York last week.

Bob Doll, global chief investment officer of equities at BlackRock, and Margaret Patel, senior portfolio manager at Evergreen Investments, also see energy as among the most compelling sectors, while renowned hedge-fund manager Jim Rogers said the credit crisis had not killed the bull market in commodities, including oil, but only dealt it a "horrible setback".

An S&P index of energy companies is currently down 41% in the second half, during which the benchmark S&P 500 index fell 34%. An index of oil services companies is currently down 67% from its record high of $364.26 hit on July 2.

"We are in a nasty global recession and oil demand will be affected by that, no question about it," Doll said. "But we are still not drilling enough holes to get enough out of the ground to replace that which we are even using at these lower levels. So oil prices, as the economy recovers, have to come back."

As the global economic slump has crushed demand for energy, some US refiners, facing dismal profit margins, have scaled back production, with more cuts likely. The Opec president last week called for more "severe" production cuts.

Doll recommended selling retailers that have rallied in recent weeks and buying energy companies instead.

"Some of the big integrated oils, we think, represent reasonable value," he said, adding he would stay in the defensive names such as Chevron and Exxon for now. Doll said buying ConocoPhillips, Occidental Petroleum and some of the bigger, more conservative exploration and production companies such as Apache Corp would also "make sense".

Evergreen's Patel said energy services companies would do well "as it gets more and more technically difficult to bring gas and oil out of the ground".

T2 Partners' Tilson, a value investor, said the energy sector had attracted "a lot of momentum-oriented investors, investors on leverage, and you are seeing all of that unwind like crazy". Tilson owns natural gas company Crosstex Energy and oil and natural gas company Contango Oil & Gas.

Renowned commodities investor Jim Rogers is also betting that dwindling reserves of oil will drive a recovery in energy, but he said he's investing directly in the commodity. He told the Reuters Summit that he bought oil last week as crude prices collapsed to near four-year lows.

Jim O'Shaughnessy, chief investment officer at O'Shaughnessy Asset Management, owns shares in Exxon Mobil, which he said have an attractive valuation. Like other money managers, he's focusing on sectors expected to fare well even in a recession.

O'Shaughnessy said he owns a number of consumer companies catering to people who are pinching their pennies, such as discount retailers Wal-Mart and Dollar Tree and satellite TV provider DirecTV.

"Do we see a theme here? People are going to sit at home, watch DirecTV, go to Costco, buy their cheap beer there and try to weather out the recession," O'Shaughnessy said.