Q: I have followed Rick Rule for a couple of decades now and always find him to be a valuable source of insight regarding the natural resources sector. Lately, he has been saying that he sees a big opportunity in the oil and gas sector because it is so "hated." A contrarian, Rick says he "loves hate." However, I am a bit confused--I don't see the "hate." For example, while a barrel of WTIC at $60 is not great, the unit price of XEG is at a 10 year high, and all of my oil and gas stocks are doing well.
Rule believes that the price of oil is bound to increase because of the recent lack of capital expenditure in the sector (he cites $1-2 billion per day of under-investment), and as a result the related equities will do well.
Do you share Rule's belief that the sector is undervalued ("hated") and therefore a good investment given a 5 year time horizon?
Thanks as always for your expertise.
Rule believes that the price of oil is bound to increase because of the recent lack of capital expenditure in the sector (he cites $1-2 billion per day of under-investment), and as a result the related equities will do well.
Do you share Rule's belief that the sector is undervalued ("hated") and therefore a good investment given a 5 year time horizon?
Thanks as always for your expertise.
5i Research Answer:
The TSX Energy index is up 148% in the past five years, but only 102% in the past 10 years. We would not fully agree it is hated but it is certainly cheap based on historical comparisons. In addition, corporate balance sheets are excellent when compared with prior cycles. And, the lack of investment is true: companies have been paying dividends, reducing debt and doing stock buybacks rather than investing. Offsetting this is OPEC (taps are on) and, potentially, Venezuela (if taps turn on). Certainly we think there is potential in the sector from current levels. The TSX is 16% energy right now. We think some representation makes good sense, but we have been advising 'less' than the TSX allocation.