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Mutual Fund News

Portfolio looks beyond crude's ups and downs

swon@globeandmail.com

What are we looking for?

What the pros are buying.

Every few months, we look at what managers are buying for their funds. It's a good way to get stock tips or check out an investment fund. Today, we look at the top holdings of Sprott Energy, which can be found at sprott.com.

More about the fund

The $109-million natural resource equity fund has been co-managed by Sprott Asset Management's Eric Sprott and Eric Nuttall since March. The fund posted a 45.7-per-cent gain for the year ended May 31 compared with the average of 24.1 per cent for its peers. The fund, which focuses mainly on oil and gas stocks, has posted an average annual return of 1.2 per cent over five years and 8.8 per cent since inception.

"We try to identify mispriced stocks, which typically places us in the small- to mid-cap sectors," Mr. Nuttall said. He is bearish on the natural gas sector for the next two or three years because of the "chronic glut" of that commodity, and is also cautious on the price of crude oil.

"I think for oil, in the short to medium term, there is a cap of around $80 to $85 (U.S.) per barrel. Unless you are a wild economic bull, I think it is going to take several years to eat through OPEC's spare capacity, and that in effect creates a ceiling on the price of oil."

But Mr. Nuttall said he looks for firms that can benefit from growing production and reserves, and whose share price can move regardless of the direction of the commodity price. "We look for companies that have current production," he added. "That minimizes my downside if the exploration program is unsuccessful."

What did we find?

Most stocks (except for Rodinia Oil Corp. which went public recently) have pulled back slightly after experiencing a nice pop over the past year. Among the holdings is Bankers Petroleum Ltd., an oil and gas company with operations in Albania. This firm has been applying Canadian technology to increase production and reserves at the oil field, he said.

The Albanian operation is currently producing 10,000 barrels of oil a day, will exit this year at 15,000 barrels and has "visible growth to produce 40,000 barrels a day over the next four years," he said. Bankers will likely be sold over the next two years and fetch about $12 a share, he added. "If oil increases [from $80 per barrel], that $12 target would increase."

Mr. Nuttall also sees "tremendous potential" in Delphi Energy Corp., a junior with operations in Alberta and B.C. "We expect that they will have a very meaningful increase in reserves this year," he said. "We see the potential for tripling production, and quadrupling reserves." His target over 18 months is $4 a share.

He also has an 18-month target of $6 a share for Rock Energy Inc., a junior drilling in the Montney and Nikanassin zones of west central Alberta. "If 10 per cent of the acreage in one of these zones proves to be successful, then Rock can triple its reserves," he said. "We think the odds of proving up Montney look very good."

*******

Top 10 equity holdings of Sprott Energy at May 31
Company nameSymbol$ Price (June 11)52-wk high $52-wk low $YTD % price chgP/E% YieldMarket cap ($-mil)Volume
Bankers PetroleumBNK-T7.059.741.5713.3NA01,609.31,619,049
Corridor ResourcesCDH-T5.066.282.10-6.52530444.180,617
Delphi EnergyDEE-T2.733.210.8559.7NA0277.0431,593
Sterling ResourcesSLG-X2.022.721.092.540267.0221,100
NuVista Energy LtdNVA-T11.7814.568.85-5.65891.81,040.9717,014
Questerre EnergyQEC-T3.385.401.1517.4NA0790.11,143,930
Rock Energy Inc.RE-T4.705.451.4046.0NA0143.630,194
WestFire EnergyWFE-T6.949.380.02-0.10.302.441,500
Advantage Oil & GasAAV-T6.518.324.05-5.7NA01,059.5215,454
Rodinia Oil Corp. *ROZ-X0.850.900.70NA *NA087.416,800
* Rodinia Oil Corp. recently went public
Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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