Derek Pilecki of Gator Capital Management manages the Long Only Energy portfolio on Covestor. We had the opportunity to ask Derek about his thoughts on the impact of the recent turmoil in the Mideast on investing in the energy sector. His response:
Here are some thoughts about the events in Libya and Egypt as it relates to The Gator Energy Portfolio.
The Gator Energy Portfolio is positioned to benefit from higher oil and gas prices going forward. The portfolio manager has the long-term view that the world is close the its peak production capacity of oil, but our forecast for oil demand rises far into the future. Since we won’t be able to increase oil production, the only way for supply and demand to remain in balance is for oil prices to adjust upward, which is lower demand. We believe the potential increase in oil prices will be higher than anybody’s expectations.
The response of oil prices to the recent events in the Middle East shows how tight spare capacity of oil production is. While we do not have a strong view of whether the recent rise of oil prices is temporary or not, we do think it confirms our view about the future of oil prices. We believe the best way to position for higher oil prices is to focus on oil producers in politically friendly countries. The largest holding in the Gator Energy Portfolio is Brigham Exploration which is a domestic exploration company focused on oil in the North Dakota. Other holdings that will benefit from higher oil prices are Suncor and Canadian Natural Resources, which have large oil reserves from their position in the Canadian oil sands. Lastly, we think investors can enhance their returns within the sector by staying away from the largest integrated oil companies. The main reason is the integrated oil companies difficulty replacing their reserves each year, so they find it more difficult to generate value than smaller companies with large land positions.
While we haven’t made any trades in direct response to the situation in the Middle East, we have put cash to work in the sector by buying stocks in 2 exploration companies: ATP Oil & Gas and GMX Resources. ATP is focusing on the Gulf of Mexico and has some promising prospects. GMX is mainly a natural gas company, but it also recently purchased land in North Dakota to begin exploring for oil. We are hopeful that both of these holdings will enhance the portfolio’s return in future periods.
Here’s the recent performance of the Covestor Long Only Energy model:
