Opportunities in Oil Companies That Can Weather Price Swings | American Funds

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Investment Insights

July 2015

Opportunities in Oil Companies That Can Weather Price Swings

Two portfolio managers discuss the lead up to the recent drop in oil prices and approaches to identifying investment opportunities in the energy sector in the current climate.



Gerald Du Manoir
Wesley Phoa
Matt Miller


Matt Miller: Gerald, let’s talk about energy for a minute. Lots of volatility this year with oil prices — in a way that no one expected — plummeting. Now they seem to have recovered somewhat. I know it’s an impossible task for anyone to predict oil prices, but how do we think about energy investments, given the climate we’re in?

Gerald Du Manoir: We tend to think of commodity-related investing through an entire cycle. So when the market gets very flustered around the potential for the commodity to go much lower, we look at companies that can resist that decline and we look at companies that can generate cash flows even at lower commodity prices. And that narrows very quickly. But it allows you to invest in companies that, when the commodity recovers in price, will do extremely well. You sort of have this leverage effect on their operating margin coming from the fact that they’re the lower cost producer. So that’s one aspect of it.

The second aspect of it is — and historically, Capital’s done that quite successfully — we look for companies where the potential discoveries, the potential reserves, are very misunderstood by the marketplace. They tend to be E&P companies, exploration and production companies, where by on-the-ground research and by the fact that our analysts have been following the oil industry for a very long time, they know the management extremely well. They know the locations, as remote as they might be, extremely well — West African coast, offshore Brazil or Indonesia — and, as such, can establish the potential future surprise that may come from discovery of those reserves.

So those are the two ways that you can participate in a very fast-declining oil price.

Matt Miller: Wesley, did you have a thought you wanted to —?

Wesley Phoa: Yes. I think there’s a bigger picture behind this energy story — which is quite important for us beyond energy investments — which is that from 2011 onwards, largely because of the Arab Spring, there were tremendous supply disruptions in the Middle East very comparable with what we saw in the 1970s. If U.S. production had not ramped up, I think it’s entirely possible we could have seen oil go up to $150, $200 a barrel. It’s quite possible we would have had a global recession. Instead of that — thanks to technological advances and thanks to a flexible economy that could respond — you had a new producer, the United States, step in and basically fill that whole gap.

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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.