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

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2010

Morningstar Advisor - August/September 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What Aspects of Health-Care Reform Will Most Affect Your Clients?
Bonds, Chicago Style
Investment Briefs
Which Risk Are You Managing?
Eye on the Prize
Advisors Can’t Rely on Fidelity Alone
Health Care Gets Back to Business
An Opportune Time to Bet the Pharm
Reform’s Impact on Other Health-Care Industries
Top Takeover Targets in Biotech
After Reform, Narrow-Moat Firms Have Strong Prospects in Diagnostics
Health-Care Investing Alive and Well
Quest for Knowledge
Four Picks for the Present
How to Make Your Bond Portfolio Inflation-Resistant
Weeding Through the Energy Patch
Uncertainty and Value in Basic Materials
Stock Market Doom-Busters
Hunting Down European Debt-Dodgers
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks With Wide Moats
VA Sales Slip a Bit in First Quarter
New at Morningstar
Star Wars, the Sequel
Morningstar Advisor - August/September 2010 - Morningstar Advisor - August/September 2010
Morningstar Advisor - August/September 2010 - Cover2
Morningstar Advisor - August/September 2010 - 1
Morningstar Advisor - August/September 2010 - 2
Morningstar Advisor - August/September 2010 - Contents
Morningstar Advisor - August/September 2010 - 4
Morningstar Advisor - August/September 2010 - 5
Morningstar Advisor - August/September 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - August/September 2010 - 7
Morningstar Advisor - August/September 2010 - Contributors
Morningstar Advisor - August/September 2010 - Letter From the Editor
Morningstar Advisor - August/September 2010 - What Aspects of Health-Care Reform Will Most Affect Your Clients?
Morningstar Advisor - August/September 2010 - 11
Morningstar Advisor - August/September 2010 - Bonds, Chicago Style
Morningstar Advisor - August/September 2010 - 13
Morningstar Advisor - August/September 2010 - Investment Briefs
Morningstar Advisor - August/September 2010 - 15
Morningstar Advisor - August/September 2010 - Which Risk Are You Managing?
Morningstar Advisor - August/September 2010 - 17
Morningstar Advisor - August/September 2010 - 18
Morningstar Advisor - August/September 2010 - Eye on the Prize
Morningstar Advisor - August/September 2010 - 20
Morningstar Advisor - August/September 2010 - 21
Morningstar Advisor - August/September 2010 - Advisors Can’t Rely on Fidelity Alone
Morningstar Advisor - August/September 2010 - 23
Morningstar Advisor - August/September 2010 - 24
Morningstar Advisor - August/September 2010 - 25
Morningstar Advisor - August/September 2010 - 26
Morningstar Advisor - August/September 2010 - Health Care Gets Back to Business
Morningstar Advisor - August/September 2010 - An Opportune Time to Bet the Pharm
Morningstar Advisor - August/September 2010 - 29
Morningstar Advisor - August/September 2010 - Reform’s Impact on Other Health-Care Industries
Morningstar Advisor - August/September 2010 - 31
Morningstar Advisor - August/September 2010 - 32
Morningstar Advisor - August/September 2010 - Top Takeover Targets in Biotech
Morningstar Advisor - August/September 2010 - 34
Morningstar Advisor - August/September 2010 - 35
Morningstar Advisor - August/September 2010 - After Reform, Narrow-Moat Firms Have Strong Prospects in Diagnostics
Morningstar Advisor - August/September 2010 - 37
Morningstar Advisor - August/September 2010 - 38
Morningstar Advisor - August/September 2010 - 39
Morningstar Advisor - August/September 2010 - 40
Morningstar Advisor - August/September 2010 - Health-Care Investing Alive and Well
Morningstar Advisor - August/September 2010 - 42
Morningstar Advisor - August/September 2010 - 43
Morningstar Advisor - August/September 2010 - 44
Morningstar Advisor - August/September 2010 - 45
Morningstar Advisor - August/September 2010 - 46
Morningstar Advisor - August/September 2010 - 47
Morningstar Advisor - August/September 2010 - 48
Morningstar Advisor - August/September 2010 - Quest for Knowledge
Morningstar Advisor - August/September 2010 - 50
Morningstar Advisor - August/September 2010 - 51
Morningstar Advisor - August/September 2010 - Four Picks for the Present
Morningstar Advisor - August/September 2010 - 53
Morningstar Advisor - August/September 2010 - How to Make Your Bond Portfolio Inflation-Resistant
Morningstar Advisor - August/September 2010 - 55
Morningstar Advisor - August/September 2010 - 56
Morningstar Advisor - August/September 2010 - 57
Morningstar Advisor - August/September 2010 - Weeding Through the Energy Patch
Morningstar Advisor - August/September 2010 - 59
Morningstar Advisor - August/September 2010 - 60
Morningstar Advisor - August/September 2010 - Uncertainty and Value in Basic Materials
Morningstar Advisor - August/September 2010 - 62
Morningstar Advisor - August/September 2010 - 63
Morningstar Advisor - August/September 2010 - Stock Market Doom-Busters
Morningstar Advisor - August/September 2010 - 65
Morningstar Advisor - August/September 2010 - Hunting Down European Debt-Dodgers
Morningstar Advisor - August/September 2010 - 67
Morningstar Advisor - August/September 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - August/September 2010 - 69
Morningstar Advisor - August/September 2010 - 70
Morningstar Advisor - August/September 2010 - 71
Morningstar Advisor - August/September 2010 - 50 Most Popular Equity ETFs
Morningstar Advisor - August/September 2010 - 73
Morningstar Advisor - August/September 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - August/September 2010 - 75
Morningstar Advisor - August/September 2010 - VA Sales Slip a Bit in First Quarter
Morningstar Advisor - August/September 2010 - 77
Morningstar Advisor - August/September 2010 - 78
Morningstar Advisor - August/September 2010 - New at Morningstar
Morningstar Advisor - August/September 2010 - Star Wars, the Sequel
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