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Blue Whale Update: New Energy Stock

Stephen Yiu - Blue Whale Fund Manager

 

Stephen Yiu is the Chief Investment Officer at Blue Whale Capital and Lead Manager of the Blue Whale Growth Fund.

Stephen co-founded Blue Whale Capital with Peter Hargreaves, co-founder of Hargreaves Lansdown, in 2016. The Blue Whale Growth Fund was launched in September 2020 and is a long-only global equity fund focusing on developed markets.

Stephen adopts a high conviction, active approach based on
bottom-up, fundamental research.

Whilst we tend not to discuss investee companies outside of the Top 10, many people have noticed a new sector appearing on our Factsheet in the last few months – Energy. We have so far made one investment into the energy sector, in a company called Canadian Natural Resources.

As always, when we invest in a company, we look for both the highest levels of quality and structural growth drivers that should assist in our mission to deliver outperformance over the long term. We consider that Canadian Natural Resources delivers on both in abundance.

The company itself owns some of the highest quality oil assets in the world – the crown jewel of which are its oil sands mines in Alberta, Canada. What makes these mines so important is that their reserves are predicted to last approximately 45 years – extremely favourable when compared to the average US shale company reserves of around 10 years. In addition, there is “zero decline” meaning minimal capital expenditure and no new costly exploration required to maintain production levels. Again, this compares favourably to conventional oil assets with around 10% per annum decline and as much as 40% per annum for US shale oil. The low cost of production means that the breakeven point for Canadian Natural is just $30 per barrel (the price today is around $75 per barrel). All this, combined with a strong management team and track record of 23 consecutive years of dividend increases, gives us the quality we are looking for in this previously unloved sector.

Whilst it is a company which has been on our radar for a while, the issue with Canadian Natural Resources (and thus keeping it out of the portfolio) had been the sector in which it sits. But the energy sector itself is now far more appealing. The biggest driver of its renewed appeal for investors are the indicators of supply challenges from the three largest oil producers – the US, Saudi Arabia and Russia.

In the US, the shale revolution in early 2010 was one of the most significant breakthroughs in the 100-year history of the oil industry. We believe it is unlikely to be repeated, whilst economics and growth profiles are deteriorating as high decline rates, cost inflation, and depletion of the best wells all begin to bite.

In Saudi Arabia and indeed OPEC as a whole, we believe the record of consistently missing production quotas demonstrates their “spare capacity” is close to being exhausted. Coupled with worsening US relations, this is likely to bias OPEC towards limited supply growth.

Clearly, for Russia, geopolitics are worsening. The withdrawal of Western technology and oil field services firms from Russia will weigh heavy on supply, whilst Western nations taking a stance against the war in Ukraine is leaving the Russian oil industry painfully lacking investment.

Finally, a general lack of investment globally with total industry capex slashed by around 50% over the last 8-10 years has put pressure on the sector. Another telling stat is that enrolment numbers in petroleum engineering courses in the US are also down approximately 50% over the same period.

Whilst we do not attempt to forecast the oil price, all the above leads us to believe the price is well supported at these higher levels.

With the key oil-producing nations suffering for one reason or another, Canada has an ace up its sleeve in the form of its ESG (environmental, social and governance) credentials. Among the top oil exporting nations, Canada offers the highest aggregate ESG score, whilst Canadian Natural Resources itself employs several initiatives and measures in recognition of its ESG responsibilities – ranging from reduction in fresh water usage and land reclamation, to workplace safety and inclusion. Whilst the discussion of ESG may seem laughable when discussing producers of fossil fuels, a more socially and environmentally-aware end consumer will be more comfortable in their consumption of natural resources if the company can demonstrate initiatives to limit its impact on the environment and improve its social credentials.

Canadian Natural Resources, therefore, sits well in our portfolio of high quality businesses, broadening out our portfolio exposure into a sector which we believe will take a greater share of the global GDP over the medium to long term.

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Blue Whale Growth Fund is manufactured by Blue Whale Capital LLP and represented in Malta by MeDirect Bank (Malta) plc.

 


Blue Whale Key Risks & Disclaimers:

The Blue Whale Growth Fund was launched in September 2020. All references to actions before this date relate to the LF Blue Whale Growth Fund.  Information on the LF Blue Whale Growth Fund is provided for comparison purposes only; it is a UK UCITS which is not registered for sale in nor is it promoted to investors in the EEA.  Whilst the investment objectives and charges are not identical, both funds are run on the same investment process.

Please note that the information provided in this article is not to be construed as advice and any views we express on holdings do not constitute investment recommendations and must not be viewed as such. If you are unsure as to the suitability of an investment for your circumstances, please seek independent financial advice. Investments can go down in value as well as up so you may get back less than you invested. Your capital is at risk. Past performance is not a guide to future performance.Blue Whale Capital LLP is authorised and regulated by the UK Financial Conduct Authority.

There are significant risks associated with investment in the Fund referred to herein. Investment in the Fund is intended for investors who understand and can accept the risks associated with such an investment including potentially a substantial or complete loss of their investment.

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and the value of your investment may be volatile and be subject to sudden and substantial falls.

Investment in a Fund with exposure to emerging markets involves risk factors and special considerations which may not be typically associated with investing in more developed markets. Political or economic change and instability may be more likely to occur and have a greater effect on the economies and markets of emerging countries. Adverse government policies, taxation, restrictions on foreign investment and on currency convertibility and repatriation, currency fluctuations and other developments in the laws and regulations of emerging countries in which investment may be made, including expropriation, nationalisation or other confiscation could result in loss to the Fund.

Income from investments may fluctuate. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. Fund charges may be applied in whole or part to capital, which may result in capital erosion. The Authorised Corporate Director may apply a dilution adjustment as detailed in the Prospectus. The Fund is not traded on an exchange or recognised market.

The foregoing list of risk factors is not complete, and reference should be made to the Fund’s Prospectus and KID.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Blue Whale Growth Fund. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.

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