NEW YORK (Reuters) – Some U.S. fund managers are trying what looks as if an not possible process: making bets on the shares and bonds of power firms at a time when oil futures have sunk to historic lows and a swelling world glut reveals no signal of letting up.
FILE PHOTO: Natural fuel flares are seen at an oil pump website outdoors of Williston, North Dakota March 11, 2013. REUTERS/Shannon Stapleton/File Photo
On Monday, merchants holding the expiring front-month May contract for U.S. crude needed to pay almost $40 per barrel to unload oil as they scrambled to keep away from having to take supply.
With provide wanting like it’ll far exceed demand for weeks, oil contracts for June on Tuesday had been at two-decade lows, with world benchmark Brent down 24%, to settle at $19.33 a barrel and U.S. crude for June down 43% to $11.57. [O/R]
The United States Oil Fund ETF was down greater than 20% on Monday.
Energy shares within the S&P 500 are down almost 45% for the 12 months thus far, greater than triple the 15% decline within the broad index over the identical time. Yet some fund managers with longer time horizons say that they’re investing in belongings starting from shares of storage amenities to distressed debt that they are saying may supply outsized returns over the subsequent 5 years.
“The market has been reacting violently because we’ve never seen anything like this before,” mentioned Charles Lemonides, portfolio supervisor of hedge fund ValueWorks LLC. “Right now we’re pumping 50% more oil than we’ve been using and it isn’t’ going to end anytime soon.”
Lemonides is specializing in transferring into senior debt issued by firms with what he calls “clean capital structures” which have priceless belongings however could undergo a chapter or capital reorganization. He is shopping for debt issued by Oasis Petroleum Inc that commerce at 10 cents on the greenback. Shares of the corporate commerce at 25 cents, down from $14 per share in Oct 2018.
He’s largely staying away from equities until they’ve “special circumstances” that might permit then to supply upsides over the subsequent two years which can be three to 10 occasions their present costs, he mentioned. Offshore companies firm Tidewater Inc, as an illustration, “we are confident in because they recently went through bankruptcy and have no debt,” he mentioned.
Eric Marshall, a portfolio supervisor at Hodges Capital, was obese power shares earlier than the worldwide financial lockdown and has been stung. Yet he believes “there are still ways to play this” despite the fact that “no one knows how long it will take for demand to come back,” he mentioned.
He has been shopping for shares of Scorpio Tankers Inc, which has seen a surge in demand as merchants hunt for storage capability. Shares are up 65% over the past month however stay down 40.5% 12 months thus far. He can also be looking for firms with low debt and robust money flows similar to Texas Pacific Land Trust, which reaps royalties from its portfolio of oil fields.
“You know this company will come back, it’s just a matter of timing,” Marshall mentioned.
Some traders stay bearish that oil and power shares will ever come again. Low-cost U.S. shale manufacturing together with enhancements in power effectivity and different sources of power have made conventional oil firms unattractive since no less than 2014, mentioned Margie Patel, a senior portfolio supervisor at Wells Fargo.
“The supply demand imbalance is going to trap oil and gas into much lower trading range” than its typical vary of $40 to $60, she mentioned.
Still, there could possibly be room in power for revenue traders who usually eschew speculative bets, mentioned Linda Duessel, senior fairness strategist at Federated Hermes.
She stays bullish on main oil firms similar to Exxon Mobil Corp that can emphasize payout ratios even when oil costs stay low, she mentioned.
“A lot of companies who pay dividends and can no longer afford them are more likely to suspend or defer than those who have the culture to say ‘This is one of the most important things to our shareholder base,’” she mentioned.
While she nonetheless considers power “the worst sector” of the S&P 500 to spend money on general, there are engaging alternatives in firms with sturdy stability sheets for traders who’ve a time horizon of two to a few years, she mentioned.
“If you believe that we are going to come out of this, which I do, and you think the U.S. is the best place to be in a recession, then there are some great sales going on,” she mentioned.
Reporting by David Randall; enhancing by Megan Davies and David Gregorio