Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined by Richard Robinson, manager of the Ashburton Global Energy Fund.
Hello, Richard.
Richard Robinson: Hello.
Wall: So, I thought we'd start by looking at your performance, which has been very good in 2016. You had 64% upside. I was just wondering how much of that was due to the fact that the oil price doubled and how much of that was due to stock selection?
Robinson: Well, actually, yes, I mean, it was a good year in 2016. I mean, it followed on from a nice year in 2015 when we were quite bearish on the oil price. So, with our model we actually desensitize from the oil price if we get bearish. So, we were actually number one in '15, number one ranked. And then '16 and actually late '15, sort of, December, we really upped the oil price sensitivity of the fund and that's why we had quite a strong '16. So, it's a little bit of a combination of the oil price and how we positioned the fund. We moved it more to a high oil price sensitivity.
Wall: I suppose then the next question must be then what is your opinion on the oil price now?
Robinson: With the six to 12-month view, we are actually pretty positive. We think that oil, the inventory – everything is now based on inventory levels. Inventory levels are very high at the moment. OPEC are beginning to actually, a little like the Fed, focuses on inflation to set their policy.
OPEC have almost changed policy and are looking and focusing on correcting those inventories. So, with the cuts at the moment, we think the inventories rebalance and will actually become much more normalized by the end of the year. So, we think we move back to a normal price which is for us marginal costs, plus maybe 10%. So, maybe by the end of the year, we move back to a sort of marginal cost level of about $65 a barrel, maybe $60 to $65. So, quite positive for oil and oil stocks.
Wall: That's not a 100% uplift though like we had last year. So, I presume then the upside for the fund is more muted although positive?
Robinson: Yeah. Well, last year was all about the price lift. Moving from $26 to $40, $45, even we finished at $50. But that sort of $26 to $40, $45 move, it was great for E&Ps, great for their cash flows but not good for activity. No one was really cranking up activity. No one was really making strong profits. Now, this year is more about activity than price move.
So, with oil prices settling above – I mean, I know they've dipped short-term below $50, but settling above probably in the second half and probably second quarter, we think this is an opportunity. Second quarter, third quarter, fourth quarter moving back above that $50 level it really engenders, I think, they said animal spirits might come back.
And particularly, in the U.S., we think there's a big market share grab going on with U.S. oil versus international. So, U.S. – and particularly, the Permian Basin in Texas, there's a real small area in Texas, this activity is very strong at the moment. So, it really is about activity pickups for this year and that is very good for service companies.
Wall: And looking at the underlying holdings in your portfolio, you have nearly 80% of the fund in U.S.-listed companies. Is that to do with that's where the real commodity is or is that to do with the fact that that is where the best-run companies are?
Robinson: Well, it's where some of the cheapest resources are. It's where a lot of activity is going on. It's where they call it short-cycle oil. So, this is oil that can come on in six months, six to seven months. So, it's that's where companies are – and also, they can hedge out, they can hedge forward six months and actually have a much lower-risk production profile if they've already forward sold their oil and they know what their profitability – roughly what their profitability is. So, it secures a much – and we see a much better growth coming from that area versus international.
So, it's really a bit of our top-down view on the oil price direction combined with our bottom-up sort of research on the acreages, who is making money, which services companies are going to be involved in bringing that oil out. So, yeah, it's a fundamental and a top-down sort of approach combined with a bottom-up knowledge of the area.
Wall: Richard, thank you very much.
Robinson: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
