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