Invesco Canada blog

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Jason Whiting | September 22, 2015

Why the price of oil doesn’t worry me

Worried about the price of oil? What if I told you that the price of oil doesn’t matter?

Think about it: Does it matter if oil is $100 and costs are $80 or oil is $60 and costs are $40? Not really, because the producer still makes $20 a barrel. That’s what I believe – this industry works it out. Whether oil prices rise, costs fall or a combination of both occurs, it will not matter.

Over time, oil companies, gas companies and related service firms have to make money. Currently, virtually no companies are making adequate returns and many are losing money. This is unsustainable, but the industry will find a resolution.

This is essentially the same belief I had about the markets in 2008 and 2009. When it seemed like every financial firm was at risk and the world economy was doomed, I believed that the world knows how, generally, to work it out. The adjustment period is painful, but eventually, things settle. We still have banks, car companies and luxury goods even though many feared that they were dropping to zero in early 2009. In the future, we will continue to have oil and gas companies and firms that provide services to that industry. With that in mind, how am I investing in energy today?

I think natural gas provides an interesting example. Gas was over $13/MMBtu in the middle of 2008, fell to between $4 and $5 in 2010 and by late 2011, was under $4. At that point, I became interested in natural gas, since it seemed feared by many investors. I asked my colleague Norman MacDonald for his favorite two or three small-cap natural gas ideas. Then I did my own research and picked Advantage Oil & Gas (AAV)*, which, despite its name, is 100% gas focused. The chart below shows the stock price of AAV and when I was buying into it, as well as the price of natural gas. (Sources: Bloomberg and Invesco Canada.)
Note: The buying cluster in late 2014 was due to fund inflows and not tied to my feelings on AAV at the time.

The vast majority of my AAV position (6.90% weight in Trimark Canadian Small Companies Fund, Series A, as at August 31, 2015) was bought in the $3.30 range, when gas itself was around $3. As you can see, natural gas was essentially down over the time frame noted, however, AAV was up significantly. (Sources: Bloomberg and Invesco Canada.)

Invesco Canada and Bloomberg
Sources: Invesco Canada and Bloomberg, as at July 31, 2015.

I believe this demonstrates how bottom-up investing works over the long run. The short-term price of gas moves AAV’s stock, but in the long term, the company’s fundamentals trump the commodity price. Despite sub-$3 gas, AAV makes money. By working with Norm, I was able to locate a company with a truly wonderful asset base. Over time, AAV’s drilling program proved the value of this asset is and the market has taken notice.

This is the same approach I’ll continue to use with this industry: buying energy companies on a bottom-up basis when I have a big idea about how those firms can win. It worked with AAV. It worked in 2008-2009. I believe it will work again with energy.

If you have any comments or questions, please feel free to leave them in the comments area below.

* The company mentioned was selected for illustrative purposes only and is not intended to convey specific investment advice.

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