"Half of (world) demand comes from emerging markets and is still growing, and the supply of oil is fairly inelastic," said Walther Lovato, a co-portfolio manager for Passport's energy strategy.
The demand inelasticity has been reflected in the price.
Brent crude started the year with a bang and has scaled a fresh two-year high of $103.37 a barrel earlier this month amid political tensions in the Middle East. And that came on the heels of a 15.2% surge in 2010.
Passport, a $4.1 billion hedge-fund manager founded by John Burbank in 2000, has had solid gains from its energy strategy fund in the last two years. It posted net gains of 11% last year, after a 53.3% surge in 2009, according to an investor letter.
Passport employs a team of six—two portfolio managers, an analyst, a mechanical engineer, a Ph.D. in materials science and a strategy consultant on power—to conduct its own studies on oil companies as well as their reserves ahead of investing in energy equities.
"One of our themes is to invest in companies with a large resource base in a stable jurisdiction, like Canada and Brazil," Mr. Lovato said.
Those two oil-producing countries have the advantages of close relationships to developing, oil-consuming nations like China and the lack of punitive regulatory measures that increase the cost and narrow profit margins in oil production.
One investment is Brazilian oil start-up HRT Participacoes em Petroleo SA. The company raised more than $1.5 billion in the country's second major industry initial public offering after state-run energy giant Petroleo Brasileiro, or Petrobras, last year. Passport owned 5.54% of HRT's pre-IPO shares.
"HRT is a strategic asset and that we are excited about its prospects. We continue to hold it, and have bought shares in the open market after the IPO. It remains a 'core' position for Passport," said Mr. Lovato.
The majority of HRT's portfolio includes 21 oil exploration blocks in the Solimoes Basin in Brazil's Amazonas state and rights to explore three African offshore blocks in Namibia, along with partners Universal Power Corp. and Acarus Investments. Its potential reserves were estimated at 1.53 billion barrels of oil equivalent by consultant DeGolyer & MacNaughton in an August evaluation, HRT said.
HRT's share price has also risen over 45% since the IPO.
The U.S., while less favorable in terms of its oil-producing environment, isn't without opportunities, Passport said. After all, the U.S. is the third-largest oil producing nation in the world.
Passport is pursuing companies that employs cutting edge technology in the field.
"After what we have seen with the success of shale gas, we pursue the same thesis with oil. With two to three times the cost of a vertical well, we can get three to five times the reserve base per well, which leads to dramatically better economics. This is often paired with much lower geological risk due to prior vertical well delineation," said Laurance Narbut, a co-portfolio manager for Passport's energy strategy. For the latest updates PRESS CTR + D or visit Stock Market news Today
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