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I'm sure you are familiar with Robert Rodriguez of First Pacific Advisors. Over the past 20 years his FPA Capital fund has returned an annualized 14.55%. Here is the link for performance data.

You don't outperform the stock market for that long without being willing to zig when everyone else says zag. Rodriguez steered his investors away from the technology bubble of the late nineties. And in 2007 had almost 40% of his fund in cash heading into the housing crisis induced financial panic.

Today Mr. Rodriguez has his investors positioned to profit and not suffer from a major problem that he sees coming down the pipe. That problem that the entire world is going to have to face is that the rate at which the world can produce oil on a daily basis has peaked and will decline.

Rodriguez gave a well known speech on June 27, 2007. The speech was well known for the prescient discussion of the looming credit crisis, but also provided this warning on the future of oil prices:

The other risk we see is energy. We have been big bulls on energy and energy prices since 1999. We include ourselves in the Hubert's peak crowd, until proven wrong. For the last several years, the general consensus has underestimated the long-term price of oil. We discussed this topic at length in our September 2006 Capital Fund shareholder letter. We are now witnessing a potential collapse in Mexican oil production in the Cantarell field. It now looks like the peak for Mexican oil production was 2004. In our discussions with some drilling rig companies, they have confirmed that the Mexican government is either "very concerned" or in a "panic." With approximately 40% of the Mexican government's budget funded by tax receipts from the state oil company Pemex, they should be very concerned.

A recent study by ExxonMobil went back and took all the oil fields discovered and what their initial estimates of proven reserves were and then added all the subsequent oil production that has taken place since the time of discovery. When this was done, the peak in oil discovery was in the early 1960s. After 40 years of the most advanced technology applications, no new major fields have been discovered to reverse the declining trend of discovery. As such, the odds are increasing that many of our older, more prolific fields are at or near their peak production levels. If this assessment proves to be correct, the era of cheap oil prices is over because conventional oil production is in the process of peaking. Should this idea, peaking conventional oil production, become a consensus opinion, what might be the implication of it for the financial markets or the economy? We do not believe this risk has been factored into the valuations for either stocks or bonds.

Rodriguez and his FPA colleagues are putting their money where his mouth is. Consider that as of the end of Q1 2011 the FPA Capital Fund was invested as follows:

  • Amount invested in equities: $976 million
  • Amount invested in the energy sector: $546 million

That makes the percentage of FPA Capital's equity investments in the energy sector 56%. And that is some serious commitment.

FPA Capital is also sitting on a 30% cash weighting so the amount of the entire fund assets allocated to energy is more like 38%.

Having conviction in his ideas and being willing to underperform at times is what sets Rodriguez and other great investors apart from the "closet indexing" gang. Rodriguez has believed in the concept of peak oil for quite some time and his most comprehensive comments came from his September 2006 shareholder letter.

I hope you will give the thoughts of Mr. Rodriguez serious consideration as he is not alone among our best investors suggesting we are facing an energy problem. At the very least, here are his top energy holdings for you to consider adding to your portfolio.

  • Rowan Companies (RDC) – 8.14% of the FPA Capital Fund
  • Ensco plc (ESV) – 7.71% of the FPA Capital Fund
  • Rosetta Resources (ROSE) – 6.67% of the FPA Capital Fund
  • Patterson Energy (PTEN) – 3.46% of the FPA Capital Fund
  • Baker Hughes (BHI) – 2.7% of the FPA Capital Fund
  • Newfield Exploration (NFX) – 2.53% of the FPA Capital Fund
  • Atwood Oceanics (ATW) – 2.24% of the FPA Capital Fund
  • St. Mary Land and Exploration (SM) – 1.85% of the FPA Capital Fund
  • Cimarex Energy (XEC) – 1.84% of the FPA Capital Fund
  • Pride International (PDE) – 1.48% of the FPA Capital Fund

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Why Bob Rodriguez Has More Than Half His Equity Holdings in Energy Stocks