A Contrarians View of Value: Energy

This is the second in a three-part series on sector opportunities as seen by a contrarian value investor — Senior Portfolio Manager Kevin Holt. The previous post discussed financials.

Demand for oil is growing at 1% to 1.5% per year. Production from many current wells is declining in the neighborhood of 5% annually. And new production is increasingly difficult and costly to locate. All this means that the oil industry must run quickly just to stay in the same place. 

That’s good news for oilfield service providers. In particular, we like Weatherford International (2.65% of Invesco Comstock Fund as of March 31, 2014). Weatherford fits our deep value focus — it’s an underperforming company that is implementing long-term changes in its culture. Its previous focus on growth resulted in below-average returns, little free cash flow and an overleveraged balance sheet. But today, it is seeking to balance growth with returns by focusing on its core business, shedding underperforming businesses and reducing costs.

On the other hand, increasingly expensive oil production is a challenge for big, integrated oil companies whose capital spending has risen dramatically in recent years without a lot to show for it. Within this environment, we like the long-term prospects for Royal Dutch Shell (1.89% of Invesco Comstock Fund as of March 31, 2014), which is decreasing its capital spending, selling underperforming assets, and returning more capital to shareholders.

In a reversal of its past focus, management at Royal Dutch Shell has stopped talking to investors about production targets, and instead has focused the conversation on its plans to increase cash flows through better operating performance and more efficient spending on projects. These are the types of actions that we believe will stem unproductive spending and show results over the long term. As a deep value manager, this is the kind of story I look for – a company that is trading at a significant discount to true value, and is taking steps that we believe will boost share prices up to our view.

Important information

Invesco Comstock Fund’s investment objective is total return through growth of capital and current income.

About risk

An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Depositary receipts involve many of the same risks as a direct investment in foreign securities, and issuers of certain depositary receipts are under no obligation to distribute shareholder communications to the holders or to pass through to them any voting rights.

Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.

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Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

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Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small- and mid-cap companies, and their shares may be more volatile and less liquid.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

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