Purpose Investments PM Jeremy Lin has been considering defensive strategies in a weak energy market
Investing in the energy industry can be a red line for some, certainly if the focus is fossil fuels, but for now many investors do see value in these stocks but are seeing tougher conditions.
Last year saw energy prices surge to levels that caused inflation to surge and households and businesses to struggle with the sudden spike in costs. But 2023 has seen a weaker energy market with several headwinds that could impact portfolios.
Jeremy Lin is a portfolio manager with Purpose Investments, and he’s been considering defensive strategies in a weaker market, especially given many investors’ attention having been drawn to big tech and AI.
He notes the decline in energy industry equities this year and that now is the time to think about what to own within the energy value chain.
“ As the famous sell-side saying goes, "long-term bullish but expecting a pullback" is an apt way of describing where we are in the cycle,” he wrote in a thought-leadership article for the firm, adding that there are “plenty of opportunities where we can pick up uncorrelated risk-adjusted returns in the short to medium term while we leave enough dry powder to capitalize on more juicy opportunities when valuations really start diverging from fundamentals.”
$60 oil ahead?
With oil currently trading at around $75 for WTI and $79 for the international benchmark Brent, Lin says we are more likely to see a barrel at $60 than $100 in the near term.
Global oil demand is uncertain with inflation, recession, supply, and more all potential disruptors.
Supply right now is abundant with some economies, notably China, still not at full speed, and output from those countries that may not get the attention of Saudi Arabia for example.
Lin cites supplies from Russia that are unlikely to be cut, while there have been strong increases in production from Iran, Venezuela, Nigeria, and Guyana – the ‘Silent 4’ in the global oil industry.
How to win
If prices are only going to decline, perhaps by 20% or so in the months ahead, does Lin see any way to win in the energy market?
“There remain many areas within the energy value chain that offer superior risk-adjusted returns that might be overlooked by investors today, given the majority of the energy headlines have centred around oil macros and speculation on how the impending recession will impact oil demand,” he wrote.
In the exploration, development, and production (E&P) space, Lin sees value in the Canadian oil sands and other markets where there are high levels of inventory, boosting the multiples of companies with skin in the game. Early-stage E&P firms may also offer value.
Another plus for the Canadian oil sands is the Trans Mountain Expansion pipeline that is due to start in 2024.
Lin also notes that the retail end of the oil industry, specifically gas stations, is an often-overlooked area for investors, especially given their product diversification which means they sell gasoline but also groceries and more.
“The key is to consider a diversified approach in minimizing correlation across positions while capitalizing on opportunities across the energy value chain,” he concludes.
