I have SU and TOU right now. How do you think they will do in the next 6 and 12 months and 3 years, and why?
The cyclicality nature of the industry is driven by both supply and demand factors. For example, in good times, oil companies tend to overinvest to drill for oil with optimistic investment assumptions, and as a result, oversupply of oil in the market often occurs, putting pressure on oil prices in general. In addition, geopolitical tension also has a huge impact on oil prices. On the other hand, oil demand is also highly dependent on economic activities, in an economic slowdown, businesses and consumers tend to consume less oil.
The industry has been in this cyclical nature for decades. In the short term (below one year), anything can happen with oil prices and oil companies’ operating results (from geopolitical tension, war, etc.). Long-term investment in oil companies requires some conviction on long-term oil prices, and investors could have differing opinions on such topics. Generally, targetting a weighting in a sector and selling when the sector position rises above that target is the easiest solution. We prefer this over trying to go in and out of the sector completely with a view to market timing. When the sector 'runs' it can run hard, and it is also somewhat counter cyclical to other investments, at times. Integrated companies such as SU, with diverse operations, tend to be less cyclical than producers. The sector remains cheap right now, and with most companies focusing on shareholder returns (dividends and buybacks) we think the outlook for SU and TOU looks pretty good for the next 12 to 36 months. Historically they are very cheap and balance sheet strength is very high compared to prior cycles.