Van Eck's lead energy analyst, Shawn Reynolds, has an MBA from Columbia Business School and a master's in petroleum geology from the University of Texas. As an investment team member of the Van Eck Global Hard Assets Fund and the Van Eck VIP Global Hard Assets Fund, he travels the world searching for new opportunities in the energy space.
The editors of HardAssetsInvestor.com (HAI) caught up with Reynolds at Van Eck's New York headquarters to discuss recent moves in the oil markets and opportunities arising from the Deepwater Horizon disaster.
HAI: What do you think of the huge moves in oil recently?
Shawn Reynolds (SR): It's all one trade. It's the euro and the macro/China trade. It's really not about long-term supply demand fundamentals.
HAI: Did oil make sense to you when it was above $80/barrel recently?
SR: Yes, above $80/barrel. But if you're talking about mid-2008 when it was above $148/barrel, no, that didn't make sense. $80-$90/barrel oil makes sense.
HAI: What do you think of some of the weird things that are going on in the oil market, such as Brent trading at a premium to WTI. Will that revert?
SR: It happens periodically when [the oil storage depot at] Cushing [Oklahoma] is overflowing, and that's what you're seeing here. It has probably happened three or four times in the last few years, and it never lasts for long.
HAI: Is there an opportunity for a trader?
SR: It's hard to trade that because it's usually focused in the front-month futures contracts. Once you go out to the next month, it flops. You have to have some physical capability if you really want to take advantage of it. For us, it's not something we would do.
HAI: What caused the recent increase in the level of contango?
SR: Cushing being full, which is related to some refinery downtime that we've encountered, both planned and unplanned. That's being resolved, and we'll probably see a drawdown at Cushing when it is fully resolved.
There's typically a seasonal build at Cushing, which is happening now, and that's being exacerbated by the refinery outings. But now we're heading into refinery season. You'll see demand ramp up, so that should cause some drawdown.
HAI: What do you do with that as an investor?
SR: I think you look for equities that are being impacted by a melange of things - China, risk contagion, technical oversupply at Cushing, the Deepwater Horizon issue, etc. To the degree you can isolate the Cushing side of things, you would buy it, but you have to be careful about the other aspects.
It's hard to trade things short term under this environment. If it's just Cushing, you might buy crude, but it's complex.
HAI: What looks most attractive to you at this point?
SR: One thing that we really like, which we've been pushing since the beginning of the year, is the new unconventional oil plays in North America. We spend a lot of our time trying to find new unconventional oil plays. We're not just talking about shale; we're talking about well-established oil-producing regions, where you can apply gas shale, horizontal drilling and new fracturing techniques. You can take a traditional sandstone environment, perhaps one that was a little tight in the vertical environment, and now new technologies like horizontal drilling can make those viable. This kind of unconventional play is a lot more economic than shale.
On a company basis, you come out with companies like Brigham Exploration (BEXP) or Sundance Energy out of Australia ((ASX: SEA)).
HAI: What about natural gas? Is it ever going to be worth anything?
SR: It's worth something now, to some people.
HAI: Not much.
SR: Yes, but what's interesting about this industry is that it has attacked costs faster than anyone I've ever seen. A year or 18 months ago, the industry was not profitable even at $6.50 gas. There might have been four companies turning a profit. I'm not sure if the industry is profitable today at $4.00 or $4.50 gas, but it's close, and there are a lot of companies that are turning a profit.
If prices recover, these companies are going to do very well. Some of it is that many of these firms have moved into the gas/liquid zones, but companies like Newfield (NFX), Noble Energy (NBL), Petrohawk (HK) and Simerex have cut costs across the board. They've gotten lean and have already gotten profitable.
HAI: Would you go anywhere near the BPs and RIGs of the world, given what is going on in the Gulf of Mexico?
SR: We've done a ton of research into it. Who is at fault? We have no idea. But we do know how this plays out in the standard sense of legal ramifications, and this is all on BP (BP).
Unless you have someone caught on videotape with a blowtorch saying, "We're going to take this baby down!," it's pretty much all on BP.
That's just industry norm.
Also, what you're hearing trickle out is that BP may have made some bad decisions. I think you'll find it hard perhaps to say they were grossly negligent, but they may have made some bad decisions.
HAI: Where do you start looking for opportunities?
SR: Well, Anadarko (APC) holds a 25 percent interest in the well, and generally would be responsible for 25 percent of the liability. But unlike the oil services guys, Anadarko has nothing to lose on the business front, and they will come after BP hard legally. When you look at what's come out of Anadarko on a market-cap basis, given how we see the liability here, it looks ridiculous.
I think with Halliburton (HAL), while you could maybe prove that the trouble with the well was their fault, there's zero legal challenge back to them. For everything they do, they have a checkoff from BP. Unless they didn't tell the whole truth in their congressional hearing, everything was checked off.
Transocean (RIG) is similar to Halliburton, where every single thing is ticked off. This might impact Transocean down the line in terms of the business they have with BP, so that could weigh on things for a year or two, but they are still one of the best in the business and they will be fine.
We won't touch BP, but with some of the other guys, I think you'll look back a couple of years from now and say, man, this was a great buying opportunity.
Disclosure: No positions
