How Oakmark Is Tapping Into Energy Opportunities
Bill Nygren says Oakmark took small positions in two well-managed firms--Chesapeake and Apache--that could see significant upside when prices bounce back.
Bill Nygren says Oakmark took small positions in two well-managed firms--Chesapeake and Apache--that could see significant upside when prices bounce back.
Jeff Ptak: Let's touch briefly on energy. I think I've read that your long-term crude oil forecast, if you had to set a price for it, the equilibrium is maybe $70 a barrel, if I'm not mistaken. Obviously, we had crude oil prices that were trading well below that through portions of last year and remain below that level today. It looks like you nibbled, added Chesapeake (CHK), built up your position in Apache (APA), if I'm not mistaken. One question is why didn't you do more? Did you not find more bountiful value within the oil patch or the energy sector more generally?
Bill Nygren: I think one reason to have not done more is the sensitivity of the two names that we purchased to oil and gas prices is significantly higher than most companies in the S&P 500. So, our way of thinking about it was that we could invest a relatively small percentage of the portfolio in these names and have a very significant upside if prices return to what we think long-term market clearing prices need to be.
One of the nice things about oil and gas compared with some of the metals commodities is that because of the decline in production that you get in all the existing wells, we're going to know relatively soon what level prices really need to get at to induce more spending, more drilling, and creating more supply of oil and gas. I think it's highly unlikely that demand changes enough to fall to the decline curves that existing wells have.
So, the nice thing is we will have an answer relatively soon. For us, where we think in seven- to 10-year timeframes, thinking that in two to three years the market will need to be back at a market clearing price, that doesn't test our patience all that much. But as we saw prices go down to $40, you saw drilling come to a screeching halt in a lot of the U.S. That drilling needs to come back to meet long-term supply.
The only question is whether that will be at $60 or at $80 a barrel? We have reasons to believe it's going to be more toward the high end of that. But again, the nice thing is that we should know relatively soon.
We picked Chesapeake and Apache because we believe both management teams there think very intelligently about deploying shareholder capital.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.