The Three Principles that Guide Randall Abramson’s Oil & Gas Investment Strategy via Streetwise Reports
The market analysis tools used by Randall Abramson of Trapeze Asset Management Inc., suggest that the broad market has been fairly valued for about a year. But by applying apples-to-apples metrics to companies in the energy sector, Abramson has found specific equities trading well below their estimated appraised values. By the end of 2015, Abramson predicts oil prices will rise back to $70 per barrel or more, and undervalued energy equities should propel toward fair value. In this interview with The Energy Report ,
Abramson pinpoints some unloved energy companies poised for the rebound.
The Energy Report: In a recent research report, you looked at the macroeconomic picture through the lens of value investing. You call the macro view “complex” and “historically unusual.” In the context of certain uncertainty, could you please provide us with three principles that guide your investment decisions in today’s market?
Randall Abramson: The reality of the day is that we have historically low interest rates and a number of crosscurrents moving through the economy. At Trapeze Asset Management we’ve developed tools, some of which we have systematized since the big downturn in 2008–2009, to cope with periods like this. We use our valuation model from a bottom-up perspective to tell us where the individual bargains are, and from a top-down perspective to tell us, in general, whether the markets or sectors are overvalued, undervalued or fairly valued. Today, our work tells us that the market has been hugging fair value pretty closely for about a year, which is unusual. That one tool helps us establish where the markets are and where they ought to be heading.
The second thing that guides us is the macroeconomic overlay. We have an economic composite and a momentum indicator, both of which are designed to predict whether there is a recession coming and/or a market debacle—not a typical correction but one of those 20% or more doozies. At the moment, our economic composite is showing smooth sailing, not just in the U.S. but also in other global economies. Our momentum indicators show relatively smooth sailing too, though a few countries, including Russia, Brazil and Peru, have negatively triggered.
And, finally, we try to determine which way the world is going. Disinflationary pressures and the ascent of the U.S. dollar have pushed down the resource sector, and most commodity prices have been badly hurt. The stagnation in many economies around the world has resulted in highly accommodative monetary policies. That’s a reason we like the resource sector: We think that reflation is around the corner.
TER: Fair value would suggest that we’re not in a bear market for energy stocks, but clearly we are.
Randall Abramson: There’s no question that the sector has been in a bear market because we define, like most people, any drop greater than 20% as a bear market. Yet it’s the most unusual energy bear market I’ve witnessed in my 25 years in the business. It’s rare to get a selloff like this that is not precipitated by a recession. The demand for oil is ever growing. It normally rises even in a recession.
“This is the most unusual energy bear market I’ve witnessed in my 25 years in the business. It’s rare to get a selloff like this that is not precipitated by a recession.”
The decline started after Brent crude went to $120/barrel ($120/bbl). It was too far above the marginal cost of production, which is usually what holds the price in check. Then you had the serious rise in the U.S. dollar, which started bringing down most commodity prices because they’re priced in U.S. dollars. At the same time you had excess supply driven by the U.S. shale boom. Then, in November 2014, OPEC said that it would not curtail oil production, knowing that would drive oil prices even lower to force production cutbacks around the world. That was probably the right thing to do, but I don’t think even OPEC expected to see oil at $40/bbl.
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