We don’t think today’s low prices can last. Here’s what we’re looking for as we anticipate the eventual shift.
I’ve been asked lately whether my view that oil will return to $75 per barrel has changed. It hasn’t, and the reason is quite simple: That’s the price needed for additional non-OPEC supply to come onto the market. At current prices in the $46 per barrel1 range, there is no economic incentive for additional output.
In the exploration and production space, virtually nobody is earning a return on their capital at current prices – not the super-majors, not the junior companies, and probably not even state-owned oil and gas producers. I’ve been investing in the energy sector for 20 years, and I have never seen oil stocks trading so cheaply.
Much of the pessimism surrounding the price of oil is based on strong flows from US shale producers, but I think speculators are missing the mark. The data we’re seeing in terms of individual well results is from companies that have access to the best equipment and the best people managing the rigs — and they’re drilling their best locations.
The current market represents a historic buying opportunity, in my opinion. And Invesco Energy Fund is buying companies that we think can potentially make a lot of money for shareholders in a two- to three-year time horizon.
For example, I’m a big fan of Devon Energy Corp. (4.68% of Invesco Energy Fund as of July 31, 2015), which I believe has been oversold.
Devon Energy is a large independent exploration and production company that has repositioned its portfolio to focus on high-returning, oil-growth properties, including the Eagle Ford and Permian Basins. Devon’s asset quality is high — its well results continue to improve and costs continue to come down. Well performance in the Eagle Ford and Permian is exceeding production expectations due to enhanced well completion designs.
In addition, due to increased recoveries, drilling and completion cost efficiencies, and base decline management, Devon impressively expects to keep its fiscal year 2016 production flat year over year — with high margin oil growth offsetting gas declines — with a 45% lower budget, even while assuming bearish futures prices.2
Financial liquidity is strong with total liquidity of $4.7 billion, including a $3 billion undrawn revolver.3 Management is focused on maintaining a strong balance sheet and has the flexibility to accelerate production growth when prices improve and corporate return on capital employed justifies increased activity.
Our investment in this company is another example of the Invesco Energy Fund discipline in action: Find quality companies that are oversold by the market and are run by an incredibly strong management team. Keeping a long-term perspective is key to finding value. We’re not investing for the next two or three weeks; we see a very compelling investment opportunity when we look out two to three years.
1 Source: Bloomberg L.P., as of Sept. 4, 2015
2 Source: Company reports
3 Sources: Company reports and Invesco analysis
Important information
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 volatility in energy prices may cause share price fluctuations.
The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.
Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com/fundprospectus.
This article was written by Norman MacDonald, a portfolio manager for Invesco Energy Fund and Invesco Gold & Precious Metals Fund.