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Rough-and-tumble energy outlook splits financial advisers

Should investors avoid the sector? Or, now that the price of oil seems to have bottomed, is it time to jump in?

By: TERRY CAIN

Date: March 24, 2015

It seemed like no big deal at the time. In late November last year the oil ministers of OPEC met in Vienna and decided to keep production quotas unchanged. It was exactly what many analysts had been expecting.

And yet the decision not to cut output sent the price of crude into a tailspin, with huge implications for consumers, businesses and investors around the world.

What to do about the energy sector is arguably the biggest question facing Canadian investors. Some oil and gas stocks have lost more than half of their value. Many companies can no longer turn a profit.

So should investors avoid oil? Or – now that we’ve seen signs the price has bottomed – is it time to jump in? After all, “buy low” is half of investing’s most basic rule.

“Oil can go to $30 a barrel, or $5. The question is, what is the probability?” says David Taylor, president and chief investment officer of the portfolio management firm Taylor Asset Management.

“The average global cost of production is about $85 a barrel. Under that, a lot of companies lose money. Over that, everyone makes money, which leads to overproduction. The further you get away from $85, the more natural forces occur pushing it back toward that level.”

Mr. Taylor’s conclusion is that the price of crude is likely to go higher, making the energy sector an attractive place to invest.

He recommends buying high-quality firms such as Schlumberger Ltd., the world’s largest oilfield services company. But he also recommends higher-risk companies that have seen their stock prices fall drastically, including MEG Energy Corp. and Athabasca Oil Corp. Both should do well if oil prices recover.

Bill Harris also sees the price of oil working its way up to the $75-to-$85 level. Mr. Harris is a partner and portfolio manager at Avenue Investment Management. But he thinks continued low prices might be needed in the short term to reduce the excess supply from the global market.

Mr. Harris’s analysis has his firm recommending an “overweight” position in the energy sector. He says there may be an opportunity for buying at even more reduced share prices this spring when companies are forced to restate the value of their oil reserves to reflect the lower crude price.

As for specific companies, Mr. Harris says “to invest in a low commodity market you need a high-quality company. This means a low-cost producer with manageable debt.” Among the companies he favours are Suncor Energy Inc., Canadian Natural Resources Ltd., Tourmaline Oil Corp. and PHX Energy Services.

While Mr. Harris is a little more cautious than Mr. Taylor, other observers are quite a bit more negative.

Brian Belski, chief investment strategist at BMO Nesbitt Burns Inc., says “oil enjoyed a 15-year rally. It won’t be undone in four months.” He sees oil and gas stocks as “value traps” and recommends underweighting the sector.

Investors would be wiser to buy into consumer discretionary stocks, particularly in the United States, Mr. Belski says. They will benefit from consumers who have more money in their pockets because of lower fuel costs.

If investors decide to take the plunge into oil and gas, they must decide whether to buy shares of individual companies or play the sector indirectly through mutual funds or exchange-traded funds (ETFs).

Mr. Taylor makes the case for professionally managed funds.

“I speak to these companies every day,” he says. “It’s next to impossible for retail investors to know what’s going on. Also investors can be too reactive and short-term in their thinking. Someone like me has experience, and access to information the average guy doesn’t.”

Mr. Harris highlights the advantages of actively managed funds over index-based products. “My bias is always to buy good companies. In an ETF you end up getting exposure to a lot of mediocre companies.”

His final thought: “There are always opportunities to invest in money-making activities at both high and low commodity prices. It just makes it a little easier when we get the chance to buy a great company at low valuations, and when the next direction for the oil price is heading up from a cyclical low.”

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