The oil and gas sector has taken a beating because of plummeting commodity prices. But energy specialist Rafi Tahmazian believes that even as the correction may be ending it's time to remain conservatively positioned.
"I'm not making investments trying to pick the bottom, or the top of the market," says Tahmazian, managing director of Calgary-based Canoe Financial LP, and manager of the $21.2-million EnerVest Natural Resources . "My feeling is that economies are still built on the price of resources. If prices are low, that will help economies significantly."
Energy stocks are down about 11% in the year to date, based on the S&P/TSX energy sub-index. Part of the decline, Tahmazian adds, is attributable to some over-leveraged companies that have been hurt by falling margins.
"Based on my 22 years in the business, it's a good time to look at the sector," he says. "Capitulation has occurred, although this time it's a more drawn-out process than what I saw in 1993, for instance, or 1997-98."
Strategically, Tahmazian has adopted a conservative stance, focusing on larger-cap, flight-to-quality names, and a large cash weighting in the fund and a sister offering, the $27.2-million Canoe Canadian Energy Class A . Lately, though, he's been adding to existing holdings and has reduced cash to about 15%.
In building a portfolio, Tahmazian tends to be contrarian in his view and picks sub-sectors before identifying individual stocks. These seven sub-sectors include oil, liquid-rich natural gas, dry natural gas, services, power and pipelines, so-called renewables and cash. Tahmazian has some flexibility in setting the weightings for each sub-sector.
"Back in March, people were saying, 'I want to be in oil.' But you would have been buying high -- it's illogical. The opportunity was there [in natural gas]."
On an individual company basis, Tahmazian scrutinizes the quality of management, whether it has a stake in the firm, and the degree of leverage. After gauging these factors, he examines the company's underlying asset base.
Given the current defensive tilt, Tahmazian likes pipeline companies such as Keyera Corp. KEY . "Pipelines have fixed prices, so that gives me more confidence in their revenue stream," he says, noting that the stock has a 4.8% dividend yield. "On top of that, companies like Keyera make sure they are the 'go-to' supplier. They have demonstrated historically they are in strategically strong areas, which means they will benefit from increased through-put."
Another favorite is Black Diamond Group Ltd. BDI , a services firm that leases housing facilities in the Fort McMurray oil sands area. "These are like mini-cities to house the workers," says Tahmazian, adding that the stock has 3.2% dividend yield.
"I don't like the service sector in general, because many oil companies are pulling back. But this one is linked to the oil sands, where companies are very long term in their thinking. That gives me more confidence in Black Diamond's revenue stream, because of who their clients are."
Holdings in any one stock are limited to about 7.5% of the portfolio. Turnover has been high, though Tahmazian attributes that to tactical changes.
A Calgary native, Tahmazian has been mostly in the corporate-finance side of the industry since he graduated in 1990 from the University of Calgary with a BA in economics. Initially he began studying geology, but at the urging of his geologist father he switched to economics when crude oil fell to US$10 a barrel. "He said, 'Go over the financial side,' so I did."
On graduation, Tahmazian worked in the accounting and finance department at a junior exploration firm, Louisiana Land and Exploration Inc. In 1993, he joined First Marathon Securities and worked as a retail broker, gravitating to the energy sector.
Two years later, Tahmazian was recruited by First Energy Capital, which soon became a leading investment banker in the oil patch and was particularly known for working closely with small-cap and micro-cap players. By the time Tahmazian left in 2008 he was vice-chairman and managing director.
After joining Canoe Financial in 2009, Tahmazian assumed management of EnerVest Natural Resources in January 2010. He also began managing Canoe Canadian Energy Class in February 2011, and in December of that year began to oversee Canoe Go Canada Energy Income Class A .
Though EnerVest Natural Resources has had negative returns in 2011 and in the first half of 2012, it has performed better than most funds in its peer group over that time. For the 18 months ended June 30, the fund lost 17.7% cumulatively, versus a 31.5% loss for the median fund in the Natural Resources Equity category.
"But it wasn't until the middle of 2011, that things started to get ugly," admits Tahmazian. In the past 12 months, the fund is down 26.8%, versus a 28.2% loss for the median fund.
"But I see a lot more clarity today than in July 2011," says Tahmazian. "There is more acceptance of the issues, and more capitulation in the market. So when everybody is grumpy, I'm happier."