With oil prices at US$82 a barrel, compared with US$70 in August 2009, prospects for energy stocks have been rapidly improving. Indeed, with global economies on the mend, managers of energy funds are bullish on the commodity.

“We see oil prices going up to US$90 by the end of the year, because we see demand coming back in the developed countries,” says Laura Lau, a senior portfolio manager at Toronto-based Sentry Select Capital Inc. and lead manager of Sentry Select Canadian Energy Growth Fund. “We see gross domestic product growth, and oil is very closely connected to that. Developing countries actually saw demand growth through the recession.”

As mature economies recover, oil inventory levels are expected to fall, says Lau. Spare capacity among members of the Organization of Petroleum Exporting Countries is also likely to fall. “When people start looking at that [spare capa-city], the price starts trading above the marginal cost of oil, or about US$70-US$83 a barrel,” says Lau, who shares duties with portfolio manager Mason Granger.

Lau took a conservative stance in the Sentry Select fund last summer, when she believed the oil price was unsustainable at US$70. But global economies proved stronger than expected and could prove to be more resilient still. “[Economies] can handle US$90 oil and still grow, but not US$150,” she says, adding that if oil reaches such heights, it would consume 7% of U.S. GDP and trigger another recession.

“That’s what happened in 2007,” says Lau, adding that similar results occurred in 1982, when the price of oil spiked because the Iran hostage-taking led to an oil embargo.

Natural gas has not fared as well as oil because of excess supply. “But we don’t see the low prices we had last summer,” says Lau, adding that gas was then as low as US$2.50-US$3 per million cubic feet. “We had record amounts of gas in storage, about 3.9 trillion cubic feet, before the winter.”

Current prices are about US$4.50 per mcf and are held back by rising offshore imports of liquefied natural gas (from major exporters such as Qatar). Gas could top out at US$6.50-US$7 per mcf, but Lau expects it will average around US$5-US$5.50 per mcf over the year.

As Sentry Select Canadian Energy Growth Fund is merging later this spring with Sentry Select Energy Income Fund, the newly merged fund will be structured to anticipate changes in the tax regime that are forcing many income trusts to convert to corporations by 2011. As a result, says Lau, the merged fund will be composed of three types of business models.

The first will consist of firms that will keep their distributions untouched, while the second group will have firms that will cut distributions entirely and focus on growth. The third type will combine growth and income.

One top income-oriented holding that will be in the new fund, which will have 30 to 35 names, is Keyera Facilities Income Fund. This firm, which processes natural gas, has a 65% payout ratio.

“It’s a nice steady business. We don’t expect it to cut its distribution. We expect at least 10%-15% cash flow growth. Its plants are in the right place, where most of the growth in natural gas is going to come from,” says Lau, noting that one high-growth area is the so-called Montney shale gas play in British Columbia.

Keyera is trading at $27 a unit and has a 6.8% distribution yield. Lau’s 12-month target is $30 a unit.

A favourite growth-oriented name is Gran Tierra Energy Inc. This oil exploration firm “has $250 million on the balance sheet and will use it to explore in Colombia and Peru,” says Lau, noting that Colombia has improved its fiscal and security regime for foreign-owned oil players.



Equally optimistic is Chris Beer, co-manager of RBC Global Energy Fund, senior portfolio manager and vice president at Toronto-based RBC Asset Management Inc.

“We are secular bulls on resources, largely because of the China theme. Together, China and the emerging markets will become about 50% of global GDP, compared with 35% today,” says Beer, who shares duties with portfolio manager Cory Jacobson.

“China’s oil consumption has already moved from one to three barrels a day per capita,” says Beer. “In the U.S., [oil consumption] is 20 barrels a day per capita, and Europe is at 18. It’s a good bet that China and emerging markets will continue to increase their consumption. It’s a positive environment for oil.”