TIM GUINNESS IS RELUCTANT to take too much credit
for much of the run-up in his
Guinness Atkinson Global Energy Fund.
"You could have employed a monkey, and he wouldn't
have done too badly,'' says Guinness, referring to the big gains made in
the oil and gas patch during the past few years.
It's easy, of course, to be modest when your
15-month-old fund is handily beating its peers. In the past year, the
Guinness Atkinson Global Energy Fund, which Guinness co-manages, has
gained 94% -- outpacing by 44 percentage points the average natural
resources fund tracked by Morningstar.
Guinness, a Briton who enjoys hunting foxes,
attributes the fund's outsized success to his past focus on exploration
and production companies. Many of these companies have handily
outperformed the larger household-name integrated oil companies that he
Recently, he discussed what he's doing with his
fund now that many of its better-performing stocks may have had their
Barron's Online: Like many energy funds, most
of your global energy fund is made up of either integrated energy
companies or companies that focus just on exploration and production of
oil and natural gas. Right now, which of these two sectors is getting
most of your attention?
Guinness: I can tell you I have been nudging up my exposure to the
Q: And why is that?
A: Because the pure-play exploration and production stocks have moved
strongly. They have outperformed the integrated companies.
The integrated companies used to have a ball and chain around their
legs, which was their refining business, and that's now much improved.
And so the valuation gap [which caused the integrated companies to trade
at deep discounts] has greatly diminished.
Q: Name one integrated company that you like
Chevron (ticker: CVX). I bought it in September 2004. I'll add to it
as I get inflows into the fund, but it currently maintains the 3.7%
The stock hasn't been a particularly good call. [Editor's Note:
Chevron, while outperforming the broader stock market in the past year,
has trailed other large integrated energy companies such as Exxon Mobil
But I think that Chevron is one of the cheapest of the larger integrated
companies around. It has a price-to-earnings multiple based on 2005
earnings of about 9.4x, whereas you see a company like an Exxon Mobil at
more than 12x.
Q: Granted, Chevron stacks up as a value. Where
is the catalyst to move the stock price up?
A: You never know what moves stocks. I have a philosophy that if you buy
stocks that are cheap in relative terms, you can sit on them and
eventually the market will re-evaluate them, and their intrinsic
cheapness will be arbitraged away.
Guinness Atkinson Global Energy Fund (GAGEX)
Annual Portfolio Turnover:
Top 10 Holdings (as of July 31, 2005)*
* Guinness seeks to have equal
weightings of 28 stocks in the Global
Energy fund. Thus, the stocks in the top
10 are only slightly more weighted in
the portfolio than the remaining stocks.
Q: But the markets are choosing not to give
Chevron the same kind of multiple as an Exxon or BP. Why?
A: There have been worries about [where] Chevron was going
strategically. They've got a good refining business; they've been doing
things in the Gulf of Mexico. I think they have, in a quiet way, been
just going about their business professionally. If I can't really see
that Chevron's prospects are worse than Exxon's, why would I hold Exxon,
if it is that much more expensive?
Q: You own a lot of Canadian exploration and
production companies such as Canadian Natural Resources, Petro-Canada
and OPTI Canada. And many of these companies have exposure to oil sands
-- which is viewed as a potential new source of oil even though it's
more expensive to extract this oil. Do you see oil sands as a theme in
your investing at all?
A: Very much so. Virtually all of the Canadian companies have an oil
sands angle to them. I'd say that 12% of the total portfolio is exposed
to oil sands versus other energy sources.
Q: What are you betting when it comes to oil
A: There are a million barrels a day of oil now produced from tar sands,
and that's going to rise to three million barrels a day over the next
eight years or so. The costs of producing this oil is somewhere between
$22 and $25 a barrel.
Q: At what point does crude oil have to be
before it makes sense to extract it from the tar sands of western
A: At a cost of $25 a barrel to extract oil from sand, a $30 price for
crude oil makes it an OK business -- not brilliant but OK. But at $50 a
barrel, it's become a brilliant business. Doing the crude math, at $30 a
barrel, you're making $5 a barrel and at $50 you are making $25. Your
profit has just gone up fivefold.
Q: Today, only about a million barrels a day of
oil is produced from tar sands, out of a total worldwide crude oil
production level of more than 80 million barrels a day. And in three
years, oil from tar sands of perhaps three million barrels a day will
have only a slightly higher percentage of total worldwide production of
perhaps 90 million barrels or so. Isn't that still a drop in the bucket?
A: Yes. But supply is getting harder and harder to grow. During the oil
crisis of the 1970s, we went out and found and developed new oil in
places like the North Sea, Alaska, and even the Gulf of Mexico. We need
to find more sources of oil, and oil sands are part of that effort.
And if you look around, there is Russia, there is the Caspian Sea, West
Africa, the Canadian tar sands and Brazil. So, there are these places,
but none of them are that huge in their own right.
Q: I noticed that you have a small exposure to
coal -- Peabody Energy (ticker: BTU) is one of your holdings. Are you
still bullish on Peabody, the largest U.S. coal operator, now that its
shares have gained more than fivefold in the past two years?
Peabody is a stock that is going to double in my opinion in the
coming years. The company produces both eastern and western coal, but I
particularly like the prospects for western coal, which is mostly
produced in the Powder River Basin of Wyoming.
This western coal has a lower energy output per ton -- about two-thirds
of eastern coal mined in Appalachia. But these large coalfields in
Wyoming are quite low in sulfur pollution, so that made them
environmentally much more attractive.
As a result, this low-sulfur coal has found a ready market. It's grown
to about 20% of the U.S. coal consumption.
And this coal has been moving up. It's [been] trading at about $10 or
$11 a ton and, in my view, it is going to $20 a ton. Prices have risen
across the board for both eastern and western coal, but there has been a
lag in the rise of western coal, which means that there is this extra
value to come through. (See Weekday Trader, "Canaries
May Sing in Massey Mines," July 20, 2005.)
I am very happy to own this stock over the next
Q: Thanks for your time.