As oil prices rise, energy funds looking better

But uncertainty means `hang on to your seats'

Your Money

April 24, 2005|By Andrew Leckey

Now it's getting personal. When my gas tank fill-up surpassed the $40 mark for the first time, world oil economics edged closer to home.

I cared little that the fellow filling up his sport-utility vehicle next to me seemed to be entering various stages of panic with each click of the pump. I was only worried about No. 1.

On the bright side of the crude oil trend, investors with money in energy mutual funds have enjoyed a welcome fill-up of their personal assets in 2005. They are the only fund shareholders who can thump their chests about being No. 1 in performance.

But nothing lasts forever. Most volatile energy funds have slipped in value since their dominant first quarter, although prospects for rising oil prices remain. Energy and other specialized mutual funds should constitute only a portion of an individual's overall portfolio.

"Strong global economic activity, with Chinese demand a big part of that story, increased investor interest, and concerns about possible supply disruption have led to these higher energy prices," explained Kevin Baum, portfolio manager for Oppenheimer Real Asset Fund, up 13.24 percent this year. "But the important thing for investors to keep in mind is that it is difficult to determine where energy prices will go."

Most individual investors have portfolios heavy in stocks that benefit from falling energy prices, Baum said. So while rising energy prices boost their energy stocks and related mutual funds, they hurt other holdings and underscore the need to have a diversified personal portfolio.

"Investors must hang on to their seats if they're investing in energy mutual funds because it can be a very bumpy ride," added Andrew Clark, senior research analyst with fund-tracker Lipper Analytical Services in Denver. "Still, based on earnings estimates, I would say that a 12 percent gain for them in coming months is realistic."

Oil analysts remain "all over the map" as to where oil prices will be headed, Clark cautioned. Yet there's no question that they will be a major force in the world's economic performance.

Finance ministers from the Group of Seven leading industrial nations recently said oil prices, up 40 percent over the past year, are "a headwind" and obstacle to solid worldwide economic growth this year.

Federal Reserve Chairman Alan Greenspan asserted that "markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation." Yet governments, he warned, should not take steps to "distort or stifle the meaningful functioning of our markets."

The bad news for those pumping gas into their cars and trucks is that oil prices, though bouncing around a bit, seem to be headed upward in the long term.

"We are in the early stages of a multiyear period of rising oil prices, with current demand of 84.3 million barrels per day and current capacity of 85.5 million barrels per day," said John Segner, portfolio manager of AIM Energy Fund, up 8.98 percent in 2005. "Oil is also becoming depleted because of the intense use of technology and the maturity of the oil fields."

Energy stocks factor in the price of oil at a highly conservative $30 a barrel, far less than current prices, Segner noted. That means that even if oil prices come down, energy stocks shouldn't be hit very hard. Sooner or later, there may also be a realization that oil industry stock prices should be valued even higher than their current levels.

Murphy Oil Corp. (MUR), the worldwide oil and gas exploration and production company; ConocoPhillips (COP), the huge integrated energy company; and Nabors Industries Ltd. (NBR), a land drilling contractor with 600 land rigs, are Segner's favorites.

"We foresee as much as a 2 percent increase in world demand for oil in 2005 and, since OPEC is producing nearly at capacity, further strengthening in oil prices," said Brian Hicks, co-manager of U.S. Global Investors Global Resources Fund, up 12.18 percent. "We believe this is part of a longer upward trend in natural resources because of a lack of investment in the 1990s."

The current energy system is running so tightly that there is no room built in for factors such as hurricanes, strikes or terrorism, Hicks warned. It took a long time to get into a situation of tight capacity, and it will take a long time to get out.

Based on their long-term potential, oil industry stocks are not overvalued, Hicks contends. However, investors must keep in mind that commodities are cyclical, with inevitable periods of weakness.

Patterson-UTI Energy Inc. (PTEN), a contract drilling business with more than 360 rigs; Transocean Inc. (RIG), the former Sonat Offshore Drilling Inc., which focuses on deepwater and harsh-environment drilling services; and previously mentioned Nabors Industries are Hicks' favorites.

Natural resources funds led all groups in the first quarter of this year, with a 12.45 percent increase, according to Lipper Analytical. Year to date, top funds include Oppenheimer Real Asset Fund "A" (QRAAX), up 13.24 percent; Profunds UltraSector Oil & Gas (ENPIX), up 12.36 percent; U.S. Global Investors Global Resources Fund (PSPFX), up 12.18 percent; Merrill Lynch Real Investment "C" (MCCDX), up 12 percent; and AIM Energy Fund (FSTEX), up 8.98 percent.

Andrew Leckey is a Tribune Media Services columnist.

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