This is part five of a five-part interview with John (Jack) E. Leslie III, CFA Portfolio Manager for the Miller/Howard Income-Equity Fund. The interview is part of ValueWalk’s Value Fund Interview Series.
Miller/Howard Investments Inc. is an independent, SEC registered investment firm with over two decades’ experience managing equity portfolios for institutions and individuals in disciplined, dividend-focused investment strategies.
Jack Leslie has over 30 years of experience in the money management industry and before joining Miller/Howard in 2004 Jack was a portfolio manager at Value Line Asset Management, M&T Capital Advisors Group (Division of M&T Bank), and Dewey Square Investors (Division of UAM). Jack has been interviewed by The Wall Street Journal, Barron‘s and Forbes Online. Jack has appeared as a guest on thestreet.com and After the Bell on Fox Business.
The interview has been divided into five parts and is downloadable as a PDF below. Stay tuned for more exclusive ValueWalk Interviews!.
Dividend investing with Miller/Howard Investments [Pt.5]
Continued from part four……
What’s your outlook for the oil sector going forward?
Our expectations have been that crude oil markets would rebalance by the end of this year or early 2017 – meaning that demand would catch up with the excess supply. Barring an unexpected recession, global demand growth coupled with falling production due to the collapse in new drilling should continue to bring the market into balance.
Conventional wisdom is that the solution to low oil prices is low oil prices. The latest data from the U.S. Energy Information Administration indicates that U.S. oil production fell to 8.9 million barrels per day in April, down from 9.7 million barrels per day at the peak last year. Moreover, the declines are accelerating, due to a lack of drilling activity, with activity falling in April alone by 200 thousand barrels per day.
We believe that oil demand will grow by about 1.2 million barrels per day globally in 2016. The biggest threat to that isn’t renewables, or weather. Very simply, it’s economic growth. The IMF recently lowered its global GDP growth outlook in the wake of Brexit. While the revisions don’t appear enough to jeopardize those initial growth expectations, we are watching closely. A Brexit induced recession in Europe, or worse, a Brexit induced recession that spreads globally, would greatly undermine the process of rebalancing in the oil markets, and would likely lead to a further pullback in prices and activity. This is uncharted territory for all involved, and even the markets appeared to have a difficult time assessing the impacts, gyrating from large losses to gains in a matter of hours.
It’s hard to overstate the importance of commodity prices to dictate activity across the industry in the short term (i.e. from year-to-year). Last month, we had the opportunity to meet with over a dozen executives from leading North American oil & gas producers. What struck us was the amount of sensitivity and operating leverage in their business models. In simple terms, every $0.10/mmbtu increase in natural gas prices and $1/bbl increase in oil prices provides an extra $6 billion in cash for the industry to spend either on new development wells, more completion activity, or to return to shareholders. Just a $10/bbl move in crude oil prices is a $60 billion swing in oil spending in the U.S.!
Crude oil prices should normalize to $60/bbl over time, a price level we believe reflects the all-in global marginal cost of supply. Prices could well trend below or above this depending on idiosyncratic developments, but are unlikely to persist there indefinitely. On the natural gas side, production continues to slowly roll over in the U.S., and prices have risen faster than expected due to heavy power generation demand, due to coal plant retirements. Long term, we don’t believe that gas prices can sustain much above $3/mmbtu, as the shale revolution provides the technological capability to bring on massive additional supplies above those levels.