One of the themes running through the top performing Nordea 1 - North American All Cap fund is the US energy revolution.
This theme has helped power the fund to a 15.4% return in the 12 months to 16 April, beating the 8.9% gain in the S&P 500.
In article for Wealth Manager, the management team of Ed Cowart and John Pandtle outline how they are exploiting this phenomenon through seven stocks.
EOG Resources is one of the largest independent non-integrated oil and gas companies in the US.
It is the premier name in this space and we have been invested in the company for some time. We are bullish on EOG as we see 10 years of growth ahead of it. EOG has a giant storage facility and as soon as the gas price becomes advantageous it can turn the taps on and natural gas can take over from where oil leaves off.
We initially purchased shares in E.I. DuPont de Nemours, the second-largest US chemical company, approximately five years ago.
It produces differentiated chemicals and specialty materials within its five segments. The company has disciplined cost controls, having engaged aggressive productivity and restructuring efforts. It is an early cycle stock and its agricultural business is strong. Falling raw material prices and lower energy costs are advantageous.
Oceaneering International provides equipment, such as remote-operated vehicles (ROVs), to deep-water and subsea drillers. The company is positioned to benefit from a strong increase in subsea and deep-water exploration and production activity, which is likely to continue well into the foreseeable future.
The company is also poised to take advantage of increased safety regulations, which may require additional ROVs per deep-water rig.
Halliburton provides products and services to energy exploration and production companies. It has been shifting from an emphasis on providing equipment – to more intelligent, technology-driven services. Equipment on site, fleet maintenance, vehicle counts and crew sizes are all reducing – while well efficiencies are increasing.
The stock is trading attractively relative to historical multiples. Meanwhile, we see improving margins as prices for a key input have collapsed. Competition in the North American fracking market should abate as marginal players operate below break-even levels, whereas Halliburton is holding the line on prices.
Devon Energy is engaged in oil and natural gas exploration and production, primarily in the US and Canada. We see improving fundamentals as it transitions to more lucrative oil and liquids production.
Devon has built a lot of momentum in the Permian Basin, which is its primary source for increasing oil production. It recently spun off and merged its midstream operations with Crosstex, unlocking a significant amount of value. While it previously traded in line with peers, midstream assets generally call for a higher multiple due to more stable cash flows.
We bought Atwood Oceanics, a small cap offshore contract driller, in August 2011. In addition to the nine units owned at the time of purchase – Atwood was building six new high specification rigs, set to be delivered by 2014.
We felt these new rigs could nearly double the company’s earnings, assuming all are employed at attractive day rates. In this regard, the industry is seeing much higher rates for modern, efficient, high specifications drilling units – such as the ones Atwood had on order. Additionally, as a high quality small cap driller, Atwood is a possible acquisition target in an industry where consolidation has long been a fact of life.
One of the world’s largest chemical, plastics and refining companies – LyondellBasell Industries specialises in olefin and polyolefin production.
With most of its operations located in North America, it has a cost advantage due to its ability to use low cost natural gas, as opposed to overseas competitors being forced to use much more oil. Despite low input costs, prices of the company’s ethylene and polyethylene output products are set by the high-cost producers worldwide. Therefore, it enjoys a margin advantage relative to its global peers.
Despite this, it trades at a discount to peers. The company has an investment grade balance sheet and a very cash-rich business model. It has a shareholder friendly business model, which has returned 80% of free cash flow over the last two years in the form of regular and special dividends.