A tactical investor in the energy sector, Rafi Tahmazian will greatly vary his cash position in Canoe Energy Class. "Cash is used aggressively," he explains. Historically, the fund's cash weighting has gone as high as 71% in the summer of 2014, to as low as around 5% by the end of 2016.
But lately, Tahmazian has been deploying more of the fund's assets. From more than 20% earlier this year, the cash position is currently about 15%, "and I would say it's going down more," he says. "We see the sector as undervalued relative to the full energy life cycle, so it's my job to put that money to work."
Tahmazian, a director and portfolio manager at Canoe Financial LP in Calgary, says that over the past eight months we've fallen to the low part of the energy life cycle, after the correction in the sector here in Canada.
"It's so unorthodox what we do," says Tahmazian. "We're counter-cyclical investors. We believe the market is always wrong and so if we like something and the market seems to agree, we move on to something else."
"The other thing we focus and obsess on," says Tahmazian, "is downside protection. That's why we use cash so aggressively and why we think investing in the best of the best companies is always a form of protection on the downside."
Tahmazian breaks down the energy sector into eight subsectors: conventional oil; unconventional oil (such as oilsands); natural gas; midstream and pipelines/transportation; energy services; renewables and alternatives; refining in both oil and liquid natural gas (LNG); and other, including uranium, coal mining and fertilizer.
It's rare that more than three of these subsectors plus cash are included at any one time in the fund, which tends to hold 18 to 25 positions. Currently, the fund is invested in conventional oil, energy services and liquefied natural gas.
In managing the portfolio, Tahmazian draws on his personal background and industry connections. He was born and raised in Calgary, his father was an oil and gas executive, and his brother is a vice-president at Paramount Resources Ltd. (POU), the largest holding in the mandate, and the fund includes the portfolios of friends and family. "Our DNA is just oil and gas," says Tahmazian.
Paramount Resources, a Calgary-based energy company that was added to the fund in early 2016, illustrates Tahmazian's four major factors in stock selection. "The first factor is the company's management and board track record," he says, "and Paramount ticks that box." Secondly, "they are good stewards of capital, with a strong balance sheet." Thirdly, the company has demonstrated the ability to acquire assets through mergers and acquisitions. Fourthly, Paramount demonstrates technical expertise in the industry.
In the oilfield energy-services area, Tahmazian has favoured fracking-services companies. One of his largest holdings is STEP Energy Services Ltd. (STEP). The Calgary-based company recently completed an initial public offering, with Canoe as the largest participant. "There are massive barriers to entry," says Tahmazian, "anywhere from the cost of building a fleet to staffing that fleet because it's such a complex, high-tech business, so that sector has a lot of protection in its pricing."
Among oil and gas producers, the Canoe fund holds Calgary-based 
Crescent Point Energy Corp. (CPG), which is widely held but has been out of favour. Tahmazian disagrees with critics who argue that management is weak and that the company has a bad track record. "I'm not convinced of that," he says. "I look at the land base, the asset base that they possess, the security that I can put on that asset base as being one of the best in the country."
Elsewhere in the energy sector, Tahmazian believes liquefied natural gas will be a growing substitute for coal and oil. "The LNG market will become a global market like oil over the next 10 years," he says. The fund's holdings include Houston-based Cheniere Energy Inc. (LNG), which constitutes part of the fund's current 12% weighting in U.S. equities.
Tahmazian admits to encountering skepticism about his bullish outlook for fossil fuels, given the prospects for the growth of electric cars and the opposition raised by environmental movements. "This electric-vehicle phenomenon, the principles around the destruction of demand based on the green movement, is wrought with so many assumptions," he says. "You cannot create an investible thesis from that."
Tahmazian contends that the lack of capital being spent on both oil and gas exploration and development is hurting supply. As for demand, "when we did our assessment of global oil demand, we came to the conclusion that we don't see that there is any pressure downward."
