Oil prices have recovered substantially from their recent lows. Portfolio manager Mike Kerr shares how he was able to recognize and take advantage of the opportunity on behalf of investors.

 

Mike Kerr

Capital Group portfolio manager

33 years of investment experience

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Will McKenna: A year ago, when we were talking about energy and prices were at these historic lows, were we able to position ourselves to benefit and take some opportunities?

Mike Kerr: First, it was a historic correction. You’d have to go back to the ’85–’90 period to find a period where the industry got such a hard shock to the system. So it was a 30-year opportunity. That’s the scale of the opportunity that occurred. That was occurring in a time period where there [was] enormous capital. So even though it was a 30-year opportunity looking at where the oil price was and where the financing of the companies [was], it was also occurring in a period where the marketplace had a cost of capital that was very low.

So we did enormous investing. And you had to just do it based on the fact that we just thought — the price was $30 — “This is not sustainable. This cannot last; it will not last.” The tough part of it is you wanted to buy companies that, if you were wrong, that it was going to take six months, a year or 18 months or two years, depending on what you wanted to take — the risk you wanted to take. Could this company get through that period, survive and then be able to prosper?

We said, “If we ultimately think we’re going to get back above $50 and $60 or $70, this is what this company is going to be worth two or three years from now.” And so that discipline gave us a lot of opportunities to just buy companies when there were periods of pessimism. What was interesting to me is that the stocks never got as cheap as I wanted. You know, I really wanted them to get cheap. I knew it was an opportunity.

Will McKenna: And why was that? Why didn’t they —?

Mike Kerr: Because I just think we were in this world where there was tremendous capital. There was an enormous amount of money out there, and there was tremendous money in the private equity area funding these companies before they went bankrupt. It wasn’t as easy to buy the companies cheap as you would think, given the historic opportunity in the environment. But the good news is, if you were patient, we had a nice nine-month period to be patient, to have our values that we wanted. Now, we don’t always– Can we pull that off every cycle? No. But we were able to do a lot of good things for our shareholders in many of the funds. And that was the opportunity.

And now the thing is, I still think we’re more to go. And maybe you can think about stocks that have done really well. So you can change which stocks you want to emphasize in this part of the cycle. And that’s something we can do and will do. And then the next step will be, at what point do the stocks fully reflect most of the good things that you want to emphasize?

Will McKenna: Everybody’s studying this industry. How do we get a differentiated view in this?

Mike Kerr: Our value added has to be that most of our competition is short term. Most of our competition is momentum driven. Most of our competition is trying to play the price of oil. And I’m just going to say, “No.” Our value added is, we look at value not just this year, but we look at what it might be in a two- or three-year, four-year, five-year time period. That’s our advantage.

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