May 2, 2012
The development of North American shale deposits represents a revolutionary shift for the energy sector as well as the region’s industrial base, which Norm Lamarche, portfolio manager at Front Street Capital, believes will improve the fiscal situation in both Canada and the United States, while ultimately altering the geopolitical balance of power.
“Game-changing technology will make North America self-sufficient in energy,” Mr. Lamarche said. “It is responsible for driving U.S. oil production up to eight-year highs and pushing the price of natural gas down so much that it has created a competitive advantage for North America’s industrial base for decades to come.”
His fund targets companies such as Dow Chemical Co., which uses a lot of natural gas in its chemical processing and is building massive amounts of new capacity. Other companies like Methanex Corp. are shuttering plants overseas and moving to the U.S. because of cheap energy.
“The president of U.S. Steel thinks this is the best thing that’s ever happened to America,” Mr. Lamarche said. “There is an industrial renaissance going on, which is feeding a lot of new industrial demand for exports.”
The manager also owns energy service providers and drillers, and is particularly fond of U.S. mid-stream operators of pipelines and liquid processing plants, because the U.S. power industry is turning away from coal-fired plants toward cheaper, cleaner-burning natural gas to replace aging infrastructure and meet electricity demands.
“To meet that growing demand for natural gas, you cannot escape the need to drill more wells every year,” Mr. Lamarche said. “The new supply of oil, natural gas and liquids, means the entire North American supply-demand fundamentals are changing rapidly.”
While economists have pointed out that much of the recent U.S. employment gains are coming from what are traditionally perceived as lower-paying service jobs, Mr. Lamarche disagrees, noting the shortage of truckers, rail car workers and rig hands.
Trillions of dollars are expected to be invested into the U.S. in order to accommodate the industry’s expansion, which Lamarche notes, is occurring regardless of the pace of China’s growth or the situation in Europe.
“The story doesn’t rely on government funding to make it happen,” he said. “In 10 to 15 years, America won’t be so dependent on the Middle East and North African oil production. Its relationships with countries like Russia and Saudi Arabia will also likely be very different.”
WHITECAP RESOURCES INC. (WCP/TSX)
The position: Owned for two years
Why do you like it? This intermediate oil producer, which acquires, develops and produces crude oil and natural gas in Western Canada, has a nice growth profile.
“Whitecap produces mostly oil, thereby generating high operating netbacks,” Mr. Lamarche said. “It also has a strong balance sheet and is looking at instituting a dividend structure sometime next year.”
Biggest risk: Weak oil prices
CANELSON DRILLING INC. (CDI/TSX)
The position: Added to existing position in past year
Why do you like it? This junior oilfield driller manufactures and operates drilling rigs in Canada’s Western Sedimentary Basin, the Permian Basin (West Texas), North Dakota and the Ebano-Panuco-Cacalilao field in Mexico.
“All of its 35 drilling rigs are custom built for unconventional and horizontal drilling, where the future of drilling is,” Mr. Lamarche said, adding that the company has no debt and pays a 4.7% dividend yield.
Biggest risk: Commodity prices, because they are a major driver of drilling activity
U.S. STEEL CORP. (X/NYSE)
The position: Recent addition to portfolio
Why do you like it? U.S. Steel is an integrated producer of flat rolled steel.
“We like it because it is also a large producer of tubular products (drill pipe) that the energy industry is increasingly using as they drill more wells, and longer-reach horizontal wells,” Mr. Lamarche said.
Biggest risk: Weakness in the U.S. or global economy
NATURAL GAS STOCKS
The position: Various short positions
Why don’t you like it? The portfolio has been short natural gas stocks for a number of years because Mr. Lamarche has a bearish view on the commodity.
Potential positive: Government-imposed fracking bans would send natural gas prices higher
What Do You Think ?