By Stephen Toy
The shale revolution, only seven or eight years old, has been the catalyst for a tectonic change in U.S. energy production and policy. It has also created a new paradigm in U.S. manufacturing, launched a renaissance in the chemical industry, and is driving infrastructure spending. So how do we think about the shale revolution in terms of investing? It's twofold.
- First, where are the opportunities to invest directly in energy? We believe capitalizing the upstream operations that extract the oil and gas is quite attractive. We also see opportunities in owning midstream assets, such as pipelines, that move oil and gas around.
- Second, what are the indirect impacts coming out of energy today? And where do we want to position ourselves to take advantage of those? The answers to these questions have led us to invest in two major areas- shipping and heavy building materials.
From shale to shipping
Starting in 2009, the shipping sector ran into crisis. This was very interesting to us, as we invest in distressed companies and industries and seek to turn them around for our investors, so we started doing research. On the surface, the shipping business model is quite easy to understand - pure supply and demand. The shipping crisis over the last few years hasn't been a demand-side problem; demand has actually grown throughout the bottom of the cycle. It's been a supply-side problem. The complexity of shipping, though, is that the number of vessel types and sizes is extraordinarily vast, and understanding the end markets that each vessel type and size serves is extraordinarily complex. When we measured demand drivers versus capacity plus supply, it made a very compelling investment case in certain very specific segments of the market, in our view.
Globalization will drive shipping broadly because it means consumption of more commodities, which move primarily by ship. The key is understanding vessel type and size and determining where the equilibrium between demand and supply will come into balance sooner than in other segments.
Building on shale impacts
In the heavy construction materials industry - think aggregates, cement, concrete, asphalt - multinationals traditionally grow through acquisition. When the global financial crisis led to a housing and construction slowdown and less government spending on infrastructure, all the end markets slowed down. From 1999 through 2010, we didn't even consider this space because in a normal cycle the multinationals are so aggressive in bidding for assets, we don't compete. But, like the construction industry, the multinationals experienced a slowdown resulting from the financial crisis, becoming sellers rather than buyers.
In the U.S., we look for above-average construction activity where we think we'll have secular tailwinds, while at the same time buying into assets that are out of favor in the market. That search led us to Texas and specifically to the Permian Basin. Our outcome, while tied to oil, will not necessarily fluctuate with the price of oil over the next three, four or five years from now, which is typically our investment time horizon. Instead, we assess whether we anticipate the price of oil staying above $60 to $65 a barrel, which we believe will create construction activity, which will, in turn, provide the desired secular tailwind.
Any change as large and as quick as the shale revolution creates confusion. For us, confusion creates opportunity.
Businesses in the energy sector may be adversely affected by foreign, federal or state regulations governing energy production, distribution and sale, as well as supply-and-demand for energy resources. Short-term fluctuations in energy prices may cause price fluctuations in an energy fund's shares.
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