Looking back, how would you describe 2008?
It was filled with incredible volatility, especially in the oil and gas sector. The first part of the year we had a huge run in commodity prices as both natural gas and oil peaked in the early summer. You had fantastic returns for the majority of stocks for the first half of the year and then in the second half you had the credit crisis drawing down the commodity prices. Oil went from $148 [U.S. a barrel] to the $50 range and gas has done the same thing. We had a conference here in June, and the optimism at the conference compared to four months later was considerably different.
How did that affect your work from day-to-day?
Targets became very difficult. The emphasis in our shop is typically on the recommendation, categorizing between sector performs and outperforms. One of the things that benefited me was that the firm takes an approach of having a balanced mix among our weightings.
Some have accused analysts of being too bullish on the way up. Is there any danger of being too negative on the way down?
It's interesting right now, in the last month and a half we've seen a pretty dramatic move up in the equity values of many of the junior and small caps in the oil and gas sector. In general, for the gas producers the fundamentals have worsened over that period. Equity values have gone up - in some cases as much as 50 per cent. I think the market has told you it believes, from an equity standpoint, that there has been an overreaction, but the fundamentals themselves aren't improving.Your biggest gainer was Duvernay Oil, which had gained 185 per cent from the start of the year to when it was taken over by Royal Dutch Shell for $5.2-billion. Why did you like it so much?
It was something kind of special amongst its peers in size and scope. We were positive on it - it's a team approach here - and we supported that story from the beginning. We had a "buy" on it since it went public. Even as that recommendation moved through different analysts, there was a firm-wide recognition of the quality of its assets and the capabilities of the management team.
Alternately, you remained bearish on Compton Petroleum as it lost 90 per cent of its value?
Those two picks are funny, because the firm has been positive on one for years and negative for one for years, and last year I guess you could say that market volatility worked in my favour. Debt levels were a serious concern at Compton, especially moving into the credit crisis.
It is quite overleveraged compared to its peers. From that standpoint, the equity values were impacted. We had a sell through the whole year.
What do you see over the next year for oil and gas?
I don't think volatility is going away, by any stretch. I think the last six months of the year we will probably see the same amount of volatility as the first six.
Fundamentals need to improve before the majority of the companies in my universe will become more active in drilling. In general, debt levels remain high and commodity prices remain too low for companies to be aggressively spending capital.
Two of our top picks are Celtic Exploration Ltd. and Storm Exploration Inc. Both entities boast strong balance sheets, possess well-defined Montney drilling inventories and have experienced management teams.
What about longer term?
I think we need to see higher commodity prices in order to see increases in activity levels and a bit of delevering of most of the intermediate and junior entities.
Most of them are in the process of renewing their banking facilities as we speak.
© 2007 The Globe and Mail. All rights reserved.
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