Fund Manager
Norm Lamarche
Resource players took it on the chin during the month of July. The investor rotation (out of Energy/Materials into Financials/Technology) that began in June, accelerated during the month of July on further evidence of slowing industrial production.
After rising 10% in the prior month, crude prices (WTI) continued its ascent in early July, increasing investor angst along with it and sending broader equity markets lower. It was interesting to note that even share prices of energy producers stopped rising with further WTI upward moves! The Fund took advantage of the early July spike to initiate a position against crude. Crude prices did however reach a choking point as it traded through $145/bl in early July before retreating to $124/bl by month’s end. While the Natural Gas price pattern was similar in style, it was also much more pronounced, dropping 32% during the period. Needless to say, commodity prices led the downturn in equity share prices in July. South of the border, the XOI and OSX dropped over 13% each, while in Canada, the S&P/TSX Energy sub index fell a similar 13% during the period. Leading the energy index lower in Canada were the Exploration/Production companies (down 16.3%). The Front Street Energy Venture Fund dropped 12.26%. Canadian small cap stocks underperformed badly in July, extending the downtrend in relative performance that began three years ago. An active Mergers & Acquisitions month benefitted the Fund as two of our positions were the subject of take-overs!
The Fund’s E&P segment was responsible for a 741 basis point net loss, while the Energy Alternatives, Energy Services and OTHER segments gave up 330, 90 and 65 beeps respectively. The Fund ended the month with a 88% net weighting and a gross 92% invested. Our long-term philosophy/approach of investing in companies that build production and reserves in a world short of production/reserves, showed well in July, albeit in a very tough market. As mentioned, two of our Fund holdings have been the subject of takeouts.
July was an active M&A period for the super majors. Struggling to find places to invest their hoards of cash, many are coming back to North America. Suffering from its toughest challenge yet internationally (TNK/BP in Russia), B.P. spent nearly $2B dollars buying undeveloped land from Chesapeake last month in approximately 90,000 acres of leasehold properties in the Arkoma Basin Woodford Shale play. These “play-types” are deeper – tighter formations that require intense drilling/services to both drill and complete these wells. These “play-types” are characterized by substantial natural gas in-place, covering larger aerial acreage that require many wells per section of land in order to recover the gas in place. The industry interest in these deposits is what drove the Fund’s exposure in the service providers that cater to them.
Helping the Fund in July was Shell’s friendly takeover of Duvernay for $6 Billion. Duvernay is a Canadian based natural gas company with a short history (management has a long history) as a company. They have grown their production base to almost 30,000 b/d equivalent, all through the drill-bit (no acquisition to speak of!). To Shell, they represent many years of drilling on their Monterey (play-type) area in Northern B.C. Canada. In a more unusual M&A transaction last month, Barrick Gold acquired a Canadian energy producer Cadence Energy (another Fund holding), as a hedge against rising energy prices in the mining business. We would expect more M&A as the year unwinds.
The volatility is unprecedented! Energy prices are heading lower. Corn is already trading at a four month low, falling in sympathy. The consumer, economy and stock markets are liking it! Demand will ultimately benefit from it as well. We are sticking to the themes.
Front Street Energy Venture Fund - Monthly Commentary
Date Published
Related Fund(s)
Fund Manager
Resource players took it on the chin during the month of July. The investor rotation (out of Energy/Materials into Financials/Technology) that began in June, accelerated during the month of July on further evidence of slowing industrial production.
After rising 10% in the prior month, crude prices (WTI) continued its ascent in early July, increasing investor angst along with it and sending broader equity markets lower. It was interesting to note that even share prices of energy producers stopped rising with further WTI upward moves! The Fund took advantage of the early July spike to initiate a position against crude. Crude prices did however reach a choking point as it traded through $145/bl in early July before retreating to $124/bl by month’s end. While the Natural Gas price pattern was similar in style, it was also much more pronounced, dropping 32% during the period. Needless to say, commodity prices led the downturn in equity share prices in July. South of the border, the XOI and OSX dropped over 13% each, while in Canada, the S&P/TSX Energy sub index fell a similar 13% during the period. Leading the energy index lower in Canada were the Exploration/Production companies (down 16.3%). The Front Street Energy Venture Fund dropped 12.26%. Canadian small cap stocks underperformed badly in July, extending the downtrend in relative performance that began three years ago. An active Mergers & Acquisitions month benefitted the Fund as two of our positions were the subject of take-overs!
The Fund’s E&P segment was responsible for a 741 basis point net loss, while the Energy Alternatives, Energy Services and OTHER segments gave up 330, 90 and 65 beeps respectively. The Fund ended the month with a 88% net weighting and a gross 92% invested. Our long-term philosophy/approach of investing in companies that build production and reserves in a world short of production/reserves, showed well in July, albeit in a very tough market. As mentioned, two of our Fund holdings have been the subject of takeouts.
July was an active M&A period for the super majors. Struggling to find places to invest their hoards of cash, many are coming back to North America. Suffering from its toughest challenge yet internationally (TNK/BP in Russia), B.P. spent nearly $2B dollars buying undeveloped land from Chesapeake last month in approximately 90,000 acres of leasehold properties in the Arkoma Basin Woodford Shale play. These “play-types” are deeper – tighter formations that require intense drilling/services to both drill and complete these wells. These “play-types” are characterized by substantial natural gas in-place, covering larger aerial acreage that require many wells per section of land in order to recover the gas in place. The industry interest in these deposits is what drove the Fund’s exposure in the service providers that cater to them.
Helping the Fund in July was Shell’s friendly takeover of Duvernay for $6 Billion. Duvernay is a Canadian based natural gas company with a short history (management has a long history) as a company. They have grown their production base to almost 30,000 b/d equivalent, all through the drill-bit (no acquisition to speak of!). To Shell, they represent many years of drilling on their Monterey (play-type) area in Northern B.C. Canada. In a more unusual M&A transaction last month, Barrick Gold acquired a Canadian energy producer Cadence Energy (another Fund holding), as a hedge against rising energy prices in the mining business. We would expect more M&A as the year unwinds.
The volatility is unprecedented! Energy prices are heading lower. Corn is already trading at a four month low, falling in sympathy. The consumer, economy and stock markets are liking it! Demand will ultimately benefit from it as well. We are sticking to the themes.