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Seeing opportunity in energy-exposed small caps

swon@globeandmail.com

WHAT ARE WE LOOKING FOR?

For do-it-yourself investors, checking out what the pros are buying in their mutual funds can be a way to get stock tips. It can also help understand a manager's strategy if you want to invest in a sector fund.

Today is the final look at the major holdings of a top-performing fund for the year ended June 30. We examined the key stocks in Bissett Energy Corporate Class, which was launched in June, 2007. It is the top performer in the natural resources mutual fund category so far this year.

MORE ABOUT THE FUND

The $15-million fund is run by Garey Aitken, a Calgary-based portfolio manager with Bissett Investment Management. The A-version fund is up a robust 26.4 per cent this year as of Wednesday, compared with 7.6 per cent for the S&P/TSX capped energy index, including reinvested dividends. Over the year ended June 30, it gained 23.4 per cent versus 28.2 per cent for the index.

From his perch in Canada's oil patch, Mr. Aitken's fund has been focusing on domestic oil and gas explorers, producers and service companies. Some of those companies also have assets outside of Canada.

His choices stem from individual stock selection as opposed to any macro-economic call. He is not a believer in the "peak oil" theory, which calls for oil prices rising higher forever because of global demand outstripping supply.

SO WHAT DID WE TURN UP?

The top 10 holdings indicate a trend to smaller-company stocks with exposure to the natural gas or energy services industry. (The fund is also invested in energy giants like Petro-Canada, EnCana and Suncor, but they have smaller weightings.)

"We tend to see more opportunities at this point in the cycle with smaller-cap entities," said Mr. Aitken, who looks for growth stocks trading at reasonable prices.

"Certainly a big theme would be that we like natural gas," he said yesterday. Some of those names include Vero Energy, Iteration Energy and Bonavista Energy.

Crude oil for September delivery, meanwhile, closed yesterday at $125.49 (U.S.) a barrel in New York, down from a recent high of around $147. "The price of oil relative to gas is probably 12 or 13 times," he said.

"I think that has got to close up. Energy equivalency would have the price of oil relative to 6:1...We have an anomaly at these levels that is unlikely to persist."

Some of his top energy service stocks include drillers like Savanna Energy and Ensign Energy, while the operating company of Mullen Group Income Fund offers specialized transportation and related services to the oil and gas industry.

"With oil at plus $120 [per barrel] and natural gas at $9 or $10 [per million British thermal units], these companies are going to be more active this winter," he suggested. "More wells will be drilled."

Top holdings of Bissett Energy Corporate Class - as of June 30
$ Price52-week52-weekYTD %1-year %Market cap.%
Company nameSymbolJuly 24high $low $price chgprice chg($-mil) weighting
Vero EnergyVRO-T8.2511.345.3042.232.22394.03
Highpine Oil & GasHPX-T11.9214.697.0319.4-14.78103.97
West Energy Ltd.WTL-T3.464.981.9050.4-23.82753.72
Canadian Natural ResourcesCNQ-T78.10111.3058.887.66.242,2103.71
Iteration EnergyITX-T6.219.084.5130.79.11,0253.66
Ensign Energy ServicesESI-T21.7624.8512.0142.715.33,3313.65
Savanna Energy ServicesSVY-T18.2524.7713.1314.0-2.71,0823.64
NuVista Energy LtdNVA-T13.9820.2310.966.76.61,1003.62
Bonavista Energy TrustBNP.UN-T31.4737.6524.1410.44.03,0993.48
Mullen Group Income FundMTL.UN-T19.7524.0713.9512.2-4.51,5873.47

SOURCE: GLOBE INVESTOR

© 2007 The Globe and Mail. All rights reserved.

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