Editor's note: Coverage of Morningstar's resources roundtable concludes today with the managers outlining their portfolio strategies and sharing their views on several of the biggest names in Canada's energy sector. This week's series, which
Q:Let's briefly discuss potash and uranium.
MacDonald: Potash Corp of Saskatchewan Inc.
Vali: I own Potash Corp. and Mosaic Co.
Lyon: I have owned Potash Corp. in the past. There is some movement back toward the cartel. It's a hard call to make.
Q:What about uranium and Cameco Corp.
Lyon: I own the stock. We can challenge Norm's thesis about gold being the most unloved commodity, because uranium would be a strong contender for this. After Japan's Fukushima disaster, there was a huge sentiment shift away from nuclear power. We look at the competing interests of energy requirements on the one hand and the low-carbon push on the other, and we think that nuclear power will still play a role for the next 30 to 50 years.
Q:Time to talk portfolios. Let's start with Scott.
Vali: Signature Global Resource has about 45% in Canadian companies and the bulk of the balance is in U.S. companies. The small international component consists mostly of large-cap mining companies such as Rio Tinto PLC and BHP Billiton PLC.
Lyon: I own both those names in AGF Global Resources. I have 52% of this fund in Canada and 32% in U.S. companies.
Vali: In all, I have 50 names in Signature Global Resource. The fund has about 62% in energy and the balance in materials. Within materials, gold represents only 5% of the fund. Toward the tail end of 2013, I sold down some of the U.S. energy winners on the unconventional oil side, such as Pioneer Natural Resources Co.
Lyon: AGF Global Resources has about 68% in energy and 32% in materials. I have been slowly shifting into the materials space, although the continued strong performance of energy has kept that weighting high. This fund has 80 names, which is partly due to the fact that it has a large selection of juniors. An example is RMP Energy Inc.
MacDonald: Trimark Resources has a fair holding in juniors. The fund has 65% in Canadian-listed companies and 25% in U.S. companies. Of the sectors, the fund has some 57% in energy, 13% in base metals, almost 16% in golds and 4% in agricultural stocks. I have a concentrated portfolio of 35 names and the top 10 holdings account for 55% of the fund.
On strategy, I have been doing a little of what Scott and Bob have been doing. I sold some Whiting Petroleum Corp.
Q:Norm, what is your biggest holding in Trimark Resources?
MacDonald: It's Crew Energy. As we discussed, there are very few companies in Canada that have concentrated, not scattered holdings in the oil patch. Crew is one of them. Tourmaline Oil Corp
Vali: Tourmaline is one of my biggest holdings in Signature Global Resource.
Lyon: It's also one of my biggest holdings and has been for some time. The company continues to exceed expectations. Even though it's largely a natural-gas player, Tourmaline has been highly profitable. It's trying to increase its weighting in liquids. The stock is cheaper than some of the other premium names such as Pioneer and ARC Resources Ltd.
Vali: Unlike a lot of the other producers in Western Canada, Tourmaline owns a lot of its required infrastructure.
Q:We have not discussed Suncor Energy Inc.
Vali: Signature Global Resource has a significant holding in the stock. It's one of those Canadian names that the equity market de-rated substantially over the past few years. With its new management came a renewed focus on operational excellence. The market is in the process of fully factoring in the expected high production that Suncor can obtain from its oil-sands assets. Suncor is one of the few companies in the Canadian oil-sands space that has a good free-cash-flow profile over the coming years.
Lyon: Suncor's stock has lost its premium company status. There are opportunities for the company and its management to do better on the capital-allocation front. Also, when Western Canada's infrastructure challenges and other issues are resolved, Suncor will be the go-to name for investors in that space. I am positioned ahead of that.
Q:At the time of Morningstar's resources roundtable two years ago, all three of you held Canadian Natural Resources Ltd.
MacDonald: CNQ has a diversified asset base including its oil sands, thermal, and one of the lowest-cost natural-gas businesses in Western Canada. The company has improved the operational reliability of its Horizon Oil Sands facility. When we talked earlier about the oil sands being that fantasy of free-cash-flow reliability, this is one of the names that is starting to deliver consistent free cash flow. There is probably no better management team in Canadian big-cap oil that knows what to do with that free cash flow. The stock has had a good year, but it is still well situated.
Lyon: For many years, CNQ was one of the premium oil and gas stocks in Canada, both in terms of execution and valuation. The company has been de-rated, partly because of hiccups in getting its Horizon Oil Sands project up and running. That is the opportunity.
Vali: CNQ is a major natural-gas producer and to the extent that natural-gas prices improve, it will be a big beneficiary. You're not paying for that in the stock.
Q:What about Encana Corp.
Vali: I own the stock. It's a dry natural-gas producer that has the opportunity to exploit the liquid-rich parts of its different plays. The development time and the cost to do this have kept the market skeptical. One of EnCana's main plays, Duvernay, a liquids-rich play in Alberta, is in the early development phase and this phase is capital-intensive.
|Canadian Natural Resources Ltd.||Encana Corp.||Suncor Energy Inc.|
|Market cap||$39.1 billion||$14.2 billion||$55.3 billion|
|Total % return 1Y*||25.4||3.2||12.3|
|Total % return 3Y*||-3.6||-11.9||0.5|
|Total % return 5Y*||9.7||-5.3||8.1|
|¹ Figures are in U.S. dollars|
*As of Jan. 15, 2014
Lyon: Encana missed the boat on natural-gas liquids with its focus on dry gas. I own the stock in both AGF Global Resources and AGF Canadian Resources. I bought it not too long ago, based on valuation. Corporate direction of Encana changed a few times over the past four or five years, so it wasn't clear that there was any sustained single direction. Its new management has brought in, in short order, clear goals and direction. To Scott's point, there are still questions surrounding some of its plays. That's the opportunity and the risk. The market is skeptical.
MacDonald: I'm skeptical. I can find better natural-gas businesses, priced at the same level, elsewhere. I own Ultra Petroleum Corp.
|Norman MacDonald, Scott Vali and Robert Lyon|