Fund Manager
Norm Lamarche
Investors realized in July that the pleasant equity ride of 2007 was on a roller coaster, as the month proved to be a wild one for all investors, worldwide. Despite its flat monthly performance (down 38 points, or down 0.3%), the Canadian S&P/TSX broad-based index set an all-time high in mid-July (up 720 points on the month) before subsequently giving up 880 points in the following weeks. There were few places to hide as initial worries over sub-prime spread into a generalized repricing of risk. Outside of cash and government bonds, riskier assets sold off.
The Energy sector in Canada followed the market lower in July, notwithstanding the large positive move in crude. Crude oil prices continued to exceed expectations, closing the month over $78/barrel, up almost $8/barrel during the period. Natural Gas, on the other hand, dipped below $6/mcf on rising North American inventories. Rising U.S. production and LNG imports have now pushed inventories above last year’s precarious levels.
In Canada the S&P/TSX Energy sub-index, gave up 1.3% while in the U.S., the S&P 500 Energy sub-index rose 0.7% and the OXS index was up 3%. For the same period, the Front Street Energy Power Fund gave up 2.74%.
The Fund’s Energy alternatives segment contributed to a 41 basis point decline, while the E&P and service stocks largely split the rest. The Fund ended the month 83.1% net invested.
During the month, Marathon Oil acquired Western Oil Sands in a friendly transaction valued at $6.5 billion. Marathon is acquiring Western’s 20% interest in the Athabasca Oilsands project (in production) as well as the company’s other in-situ bases. Also in Canadian oilsands’ world last month was news that Suncor would expand its oilsands capacity by over 100,000 bbl. Shell also announced an aggressive $45 billion heavy oil upgrading capital spending program. The super majors continue to look at both the geopolitically stable areas as well as unconventional resources for future capital expenditure. Canada is increasingly making sense, from an investment perspective, in a world short of friendly opportunities. As a case in point, Exxon Mobil is looking to offer some of its technical expertise to develop the giant Kashagan oil field (ENI operated). The 13 billion barrel Caspian field discovered in 2000 is geographically challenging as the environment is frozen half of the year. The capital cost to develop the field has quadrupled since the 2004 estimate of US $34 billion to over $130 billion. Further difficulties include the Kazakstan government’s insistence of owning as much as 40% of its profitability! Sound familiar? Also sounding familiar is the North American Natural Gas scene. Growth in demand for 2007 is set to reach over 2.5% over last year’s level. The problem is that both U.S. production and LNG imports into the U.S. are growing at a faster clip. U.S. producers, however, continue to drill through the short term weakness in prices. While U.S. drilling activity has receded somewhat recently, activity levels remain at a record pace, particularly in the Texas, Oklahoma and U.S. Rockies on-shore basin. The Fund is trimming its Natural Gas positions or layering shorts.
Barring any significant supply disruptions (for example, as a result of hurricane activity) or a faster demand response, we suspect the Natural Gas commodity will have to “chew through” accumulated inventories before a potential recovery could take place. Worst still could be the prospective “gas-on-gas” competition, sending spot prices even lower.
We suspect that the month of August will prove to be equally challenging for all investors, as we sort out the implications of the credit squeeze. Mergers and acquisitions activity will become the target. The dust should settle as the underlying world economic growth rate, as well as corporate earnings, will provide support. Not withstanding the fundamentals, we will have time to spend our cash. With the lack of M&A activity in the near future, investors may just take the rest of the summer off! Flight-to-quality is in full force. Bargains will develop in the smaller-to-intermediate groups as the slow drip summer doldrums take hold. The Uranium stocks are trading at half levels already, from the highs reached in March – April.
Norm Lamarche
Portfolio Manager
Front Street Capital
Front Street Energy & Power Performance Fund
Date Published
Fund Manager
Investors realized in July that the pleasant equity ride of 2007 was on a roller coaster, as the month proved to be a wild one for all investors, worldwide. Despite its flat monthly performance (down 38 points, or down 0.3%), the Canadian S&P/TSX broad-based index set an all-time high in mid-July (up 720 points on the month) before subsequently giving up 880 points in the following weeks. There were few places to hide as initial worries over sub-prime spread into a generalized repricing of risk. Outside of cash and government bonds, riskier assets sold off.
The Energy sector in Canada followed the market lower in July, notwithstanding the large positive move in crude. Crude oil prices continued to exceed expectations, closing the month over $78/barrel, up almost $8/barrel during the period. Natural Gas, on the other hand, dipped below $6/mcf on rising North American inventories. Rising U.S. production and LNG imports have now pushed inventories above last year’s precarious levels.
In Canada the S&P/TSX Energy sub-index, gave up 1.3% while in the U.S., the S&P 500 Energy sub-index rose 0.7% and the OXS index was up 3%. For the same period, the Front Street Energy Power Fund gave up 2.74%.
The Fund’s Energy alternatives segment contributed to a 41 basis point decline, while the E&P and service stocks largely split the rest. The Fund ended the month 83.1% net invested.
During the month, Marathon Oil acquired Western Oil Sands in a friendly transaction valued at $6.5 billion. Marathon is acquiring Western’s 20% interest in the Athabasca Oilsands project (in production) as well as the company’s other in-situ bases. Also in Canadian oilsands’ world last month was news that Suncor would expand its oilsands capacity by over 100,000 bbl. Shell also announced an aggressive $45 billion heavy oil upgrading capital spending program. The super majors continue to look at both the geopolitically stable areas as well as unconventional resources for future capital expenditure. Canada is increasingly making sense, from an investment perspective, in a world short of friendly opportunities. As a case in point, Exxon Mobil is looking to offer some of its technical expertise to develop the giant Kashagan oil field (ENI operated). The 13 billion barrel Caspian field discovered in 2000 is geographically challenging as the environment is frozen half of the year. The capital cost to develop the field has quadrupled since the 2004 estimate of US $34 billion to over $130 billion. Further difficulties include the Kazakstan government’s insistence of owning as much as 40% of its profitability! Sound familiar? Also sounding familiar is the North American Natural Gas scene. Growth in demand for 2007 is set to reach over 2.5% over last year’s level. The problem is that both U.S. production and LNG imports into the U.S. are growing at a faster clip. U.S. producers, however, continue to drill through the short term weakness in prices. While U.S. drilling activity has receded somewhat recently, activity levels remain at a record pace, particularly in the Texas, Oklahoma and U.S. Rockies on-shore basin. The Fund is trimming its Natural Gas positions or layering shorts.
Barring any significant supply disruptions (for example, as a result of hurricane activity) or a faster demand response, we suspect the Natural Gas commodity will have to “chew through” accumulated inventories before a potential recovery could take place. Worst still could be the prospective “gas-on-gas” competition, sending spot prices even lower.
We suspect that the month of August will prove to be equally challenging for all investors, as we sort out the implications of the credit squeeze. Mergers and acquisitions activity will become the target. The dust should settle as the underlying world economic growth rate, as well as corporate earnings, will provide support. Not withstanding the fundamentals, we will have time to spend our cash. With the lack of M&A activity in the near future, investors may just take the rest of the summer off! Flight-to-quality is in full force. Bargains will develop in the smaller-to-intermediate groups as the slow drip summer doldrums take hold. The Uranium stocks are trading at half levels already, from the highs reached in March – April.
Norm Lamarche
Portfolio Manager
Front Street Capital