This week saw the 10th anniversary of T Boone Pickens’ Pickens Plan, designed to reshape America’s energy policy. It is also five months since the launch of the Pickens Oil Response Index (PORI) and ETF (BOON). Like the Pickens Plan, BOON acknowledges the importance of the demand-side of energy and incorporates it into its strategy.
Toby Loftin, founder of the adviser and designer of the index, says that, since launch, the USD7 million ETF has achieved its aims of outperforming other energy related ETFs on a risk-adjusted basis.
“The balance of traditional energy, technology and materials has done what we expected it to do because you are not taking direct commodity price exposure in the entire basket of stocks – it’s balanced.”
The narrative for the last three or four years has been the oversupply of oil, Loftin says, well beyond the five-year average.
The OPEC+ agreement to cut 1.8 million barrels a day of overall production (established originally in Nov 2016) saw strong commitment from Saudi Arabia and Russia, Loftin says.
“It has played out like they said they were going to do. Now they can stay strong and stable, but there is a question about the supply side, specifically Iran and the degree to which sanctions will impact exports and we think they will significantly.
“Trump will take a more zero tolerance approach compared to the previous administration with way more impact in terms of ability to accept import or buy Iranian barrels.”
Loftin observes there are two other supply side factors to consider, with Venezuela heading towards one million barrels a day or lower, which he describes as “an unmitigated disaster from the perspective of the Venezuelan people and the economic consequences of the mismanagement.”
He also points out that regional conflict in Libya has reduced the country’s ability to produce oil, which is well below capacity. “It will probably resume more quickly but it couldn’t have come at a worse time in terms of a supply disruption,” he comments.
He also points out that the general investment community tends to forget that you have to spend money in oil fields to maintain existing production and to fund and grow new production.
“CapEx on oil production has been 40 per cent lower from 2014 to 2017. The largest cut since the 1980s which will have a ripple effect which won’t show up until 2019 to 2021 as offshore oil projects have a long lead time especially when compared to the short-cycle barrel produced here in US shale.”
Shale oil production has a short cycle of 12 to 18 months. The methodology behind the index and the ETF is designed to address these issues. “We have a significant portion of the index in traditional energy companies such as Diamondback, an independent oil and natural gas company headquartered in West Texas. The index also includes companies who benefit from the increased consumption of energy, especially those which enjoy a relative cost advantage because they’ve access to abundant, cheaper US energy supplies.
“They have grown reserves in an area that is going to be a significant producing region,” Loftin says. “West Texas is as big as Iran and nearly as big as Iraq in terms of daily oil production. We are getting to a point where oil prices are going to be increasingly affected by US supply growth. Demand for oil is intact and demand for plastics and other goods and services are strong and continue to enjoy tailwinds at the same time. If oil prices retrace in 2019 you will have lower prices that will invite demand back into the equation. We are acknowledging the need to have a balanced approach.”
Turning to trade wars, Loftin believes that cooler heads will prevail. “Trade wars and tariffs are accounting measures. They are not creating anything,” he says.
“We have abundant resources with natural gas and crude oil hitting records. Regardless of policy, America has the physical resources to underpin the energy revolution.”
The ETF is gaining in popularity with investment advisers in the US. “I think the folks that recognise there is a tectonic shift in the way the energy industry operates and the way that industry is responding to that are the ones who appreciate a balanced approach to investing in energy. They want to be able to say to their clients: ‘We have exposure to energy in a lower risk, balanced fashion’.”