Morningstar Advisor - August/September 2010 - 58

Talking Points

Weeding Through the Energy Patch
By Morningstar’s Mutual Fund Analysts

The Issues
Since the Deepwater Horizon began spilling oil into the Gulf of Mexico on April 20, many have been thinking about how to invest—or not to invest—in energy. British Petroleum BP leased the rig that exploded from Transocean RIG. Texas-based energy and production firm Anadarko Petroleum APC also had a 25% share of the Macondo Prospect, the name of the area in which the explosion occurred. Halliburton HAL installed and cemented the production casing for the well that exploded. BP is down more than 50% from its 52-week high, and many drillers are down 40%. FMI Large Cap FMIHX, one of the largest mutual fund holders of BP shares, with 4% of its assets in the company’s shares on March 31, issued a news release June 1 saying that it had sold its position. Meanwhile, others have nibbled at the energy shares. Often, these investors are looking past the short-term controversy over which firms are liable for cleaning up the spill. They view the drilling-rig owners as potential good investments, precisely because their stocks have dropped along with the exploration and production companies’. That thesis was bolstered when a judge overturned the Obama administration’s attempt to put a moratorium on deep-water drilling in the Gulf of Mexico.

Quotable
“Despite the BP event, deep-water offshore exploration remains the major secular growth in the energy sector. Yes, you will get increased regulation and inspection, but that means just more growth for the servicers like Cameron and Halliburton.” Shawn Reynolds Van Eck Global Hard Assets GHAAX

“People may like offshore production, but it doesn’t have the reliable production profile of onshore production, and there are opportunities onshore. In that sense, those onshore stocks can be less risky.” David Kiefer Prudential Jennison Natural Resources PGNAX

The Points
r Some of the industry’s most well-regarded funds have sold out of BP. Tom Marsico of USAA Aggressive Growth USAUX had been selling BP shares before the accident and accelerated his sales soon after. Thornburg International Value TGVAX started selling BP shares on the day of the accident and was completely out of the stock in three days. Manager Wendy Trevisani remarked at the Morningstar Investment Conference in late June that her main reason for selling was her lack of faith in BP management’s claims about the firm’s environmental friendliness. r Among the managers expressing recent interest in BP shares is Philippe Brugere-Trelat of Mutual European TEMIX, who has taken a small position. r Drillers, even those without much exposure to the Gulf of Mexico, have suffered as well. Diamond Offshore DO, Noble Corp. NE, Pride International PDE, and Ensco ESV have dropped an average of 27% from the day of the explosion through June 28. r One prominent owner of Ensco is FPA Crescent FPACX; Ensco shares soak up 4% of the fund’s assets. FPA Crescent manager Steve Romick, a Morningstar Manager of the Decade nominee, didn’t comment on this stock in particular at Morningstar’s conference, but he seemed quite confident in owning stocks in the energy patch. He argued that the supply of fossil fuels is diminishing and demand for them is increasing.

“This event is an opportunity to separate the long-term winners from the losers when all are cheap. One way of playing this is to be in the oil servicers who don’t have significant exposure to the Gulf, like Halliburton, which has less than 10% of revenues from that region.” Fred Sturm Ivy Global Natural Resources IGNAX

“We think [BP’s debt is] closer to double-A than triple-C. … We think it’s [of] significant value, and we’ve started to buy some.” Bill Gross PIMCO Total Return PTTAX

58 Morningstar Advisor August/September 2010

Morningstar Advisor - August/September 2010

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