Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Michael Hulme, Manager of the Carmignac Portfolio Commodities Fund.
Hi Michael.
Michael Hulme: Hi Emma.
Wall: So you are here today to do your three stock picks. The first I believe is actually a short. What stock is that?
Hulme: Yes, Emma. Since we've done this before, I thought I'd throw in a short into the mix and we do have an option in our fund to have a diversified basket of shorts. My short pick topically would be Neste Oil (NESTE). Now Neste Oil is a refiner based in Finland that also makes renewable diesel, which is very much a green fuel. The company touts its low carbon intensity qualities and a number of other positives and is benefitted over the last few years from very high levels of effectively of subsidies of credits both in the U.S. and through various European legislation incentives towards renewable fuels.
Now why do I think that’s a short. Well, a) it's very expensive, b) Neste's primary business is to produce normal diesel and normal diesel as we know is going to be quite challenged going forward in Europe. All the refiners are geared to producing middle distillates in diesel and we are looking at a market that is probably at peak diesel demand as we move away from the Volkswagen scandal towards hybrids. So, that's one part of the case.
The other part of the case is of course that this renewable diesel isn’t as green as people would like to think it is. Ultimately renewable diesel often comes from palm oil in Malaysia or derivatives of palm oil. We all know that palm oil comes from deforestation which is ultimately creating more greenhouse gases ultimately. Therefore, the carbon pathways for Neste to generate renewable diesel are a little bit of a grey area.
We think with Trump and the focus on domestic producers whether it's renewable fuels or fossil fuels will reduce the incentives for Neste in that market. So, we see the business as challenged in terms of profitability and returns going forward.
Wall: And what's the second stock?
Hulme: Second stock is one that’s closer to home and its Weir Group (WEIR) and you might ask why I'm talking about an engineering company, a U.K. engineering company. Well Weir despite being close to where we are today. What they do is they make pumps and pumping equipment that is often sold both at mining industry, but particularly also for the shale industry. It's an essential part of fracing. The pumps provide the pressure that drives the water in the sand down the hall into the well and into those areas where you frack.
So, those pumps are essential pieces of kit and guess what. If you are pushing thousands of gallons of water down a well at very high pressure with very abrasive contents like sand you are going to wear those pumps out pretty quickly and as we ramp up again in the Permian, Weir's pumps will be very much in demand. We think it's one to watch in 2017.
Wall: So you've had one short, one long and a final long.
Hulme: Final long is I think a solid name that hasn’t seen much in terms of performance over the last year or two, particularly through the oil downturn. But now as we move forward Suncor (SU) which is a Canadian oil sands company is very much poised to benefit from several things. First the Trump regimes willingness to engage in discussions over pipelines with Canada which is going to help bring oil sands product to market it is going to help bring that bitumen and that synthetic crude oil down to the Gulf Coast that’s going to improve companies like Suncor's margins and profitability.
Suncor is also coming off a period of very high investment and as oil prices recover we're going to see excess cash flows and that’s going to create free cash flow generation which is going to pay dividends and make shareholders very happy. So, we think that’s one to keep in your pocket.
Wall: Michael thank you very much.
Hulme: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
