The price of oil may be back above US$70 per barrel, but energy specialist Laura Lau expects it to pull back.
"Fundamentally, oil should not be at this level," says Lau, 39, lead manager ofSentry Select Canadian Energy Growth and senior portfolio manager at Toronto-based Sentry Select Capital Inc. "Finished product inventories, especially diesel, are very high."
OECD countries have over 60 days' worth of crude oil inventories, compared to between 52 and 54 in normal economic conditions. "The market was saying, 'there's green shoots, and things are getting better.' I'd say, yes, it's getting better. But not enough to eat into oil inventories yet," says Lau.
A top-down investor, Lau has been maintaining a 25% cash weighting, down from 31% in April. "We expected this would be a bear market rally. This is an exceedingly volatile sector; you have to trade it."
Lau, who works with co-manager Mason Granger, has spent some cash to acquire new, largely defensive positions. One example is Keyera Facilities Income Fund ( KEY.UN/TSX), a natural gas processor based in Western Canada. "There isn't a huge upside," says Lau, who anticipates single-digit growth for the share price. "But it's a good business, and we get a steady 9% yield."
Another new name is Imperial Oil Ltd. ( IMO/TSX). The integrated oil company has no debt, and operates the Kearl oil sands project. "Other companies have cancelled their oil sands projects. This speaks to the strength of its balance sheet and management, that they are counter-cyclical," says Lau.
More cash will be deployed over the summer. "The next rally will be more real," says Lau. "We expect the recovery will start in the fourth quarter. We will add more torque then and switch into more offensive names."
A Hong Kong native, who grew up in Toronto, Lau joined the investment industry via a circuitous route. After graduating in 1992 with a bachelor of applied science in industrial engineering from the University of Toronto, Lau encountered a tough job market and landed a computer programming job in the IT department at Canada Life.
Within two years, she moved to the IT department at Spectrum Investment Management Ltd. In 2002, Lau was hired as an analyst by Karen Bleasby and helped manage the firm's Tactonics fund. When the company was sold to CI Financial, Lau followed Bleasby to Mackenzie Financial Corp., but stayed less than half a year.
In 2004, Lau joined Sentry Select. Although she had no background in energy stocks, she learned from the ground up. She also benefitted from the experience of seasoned managers such as Kevin MacLean, Sandy McIntyre and Glenn MacNeill.
"Being an engineer, really helped me analyze oil and gas companies," says Lau. "There is a lot of science involved, and I picked it up very easily. I also learned that you have to trade stocks; you can't just buy and hold."
Lau assumed the fund in April 2008, after MacNeill left the firm for Lawrence Asset Management Inc. When oil hit US$147 a barrel in June, Lau began selling many stocks, and switching to more conservative names.
While that helped the fund somewhat, it still lost a whopping 36.7% during September and October of 2008 -- the worst period of the bear market. During those two months, the median fund in the Natural Resources Equity category lost 43.6%.
However, holding a lot of cash hurt the fund in the booming months that followed. Over the six months ended July 31, it returned 17.5% compared to the 25.2% gain for the median fund.
Lau tends to run a concentrated fund with about 30 holdings. Single positions are limited to about 5%.Turnover has been high, at 121.7% in 2008. That is largely attributable to last year's intense volatility and manager changes.
Looking ahead, Lau is pessimistic about natural gas as industrial demand has fallen considerably during the recession. "Inventories are very high. The question is, how much do we have to shut in? U.S. production has rolled over, but it's not soon enough," says Lau. "We are looking to buy in to the gas-oriented companies, but not yet."
As a consequence, about 70% of the invested portion is weighted to oil companies. One of the names that are leveraged to the oil price is Bankers Petroleum Ltd. ( BNK/TSX). The firm is developing heavy oil production in Albania. "It's the biggest onshore oil field in Europe," says Lau, noting that the firm is developing technology to maximize the extraction of over 300 million recoverable barrels.
"The question is technology, and the oil price," says Lau, who expects oil will decline to around US$50 a barrel over the summer but as inventories are depleted reach US$65 to US$70 by the fourth quarter. "You need higher prices to make this work."
