Crude oil prices hit a record high near $150 a barrel in 2008 and ricocheted down near $30 a barrel at year end, bedeviling energy-sector investors.
Amid that volatility, Edmund Nicklin, who manages the Westport Funds, asks: "Why would any sane person" want to invest in oil stocks?
The answer lies in the future and not in the past, says Nicklin, who, far from having his sanity questioned, has been praised as a savvy stock picker.
Though down on the year with many others amid the global economic turmoil, Nicklin's Westport Fund was ranked in September by analysts at Lipper as one of the top 10 performing multi-cap funds, based on one-year performance.
Year-to-date, the fund was down 31.4% on Dec. 30, but that's 6.5% better than the Standard and Poor's 500 index, according to Morningstar. The three-year performance was down 4%, but that's 4.8% better than the S&P 500.
Oil and gas is the biggest sector holding among the three dozen or so stocks held by Nicklin in the small but highly regarded fund, which has assets of around $118 million and has a five-star rating by Morningstar.
The fund seeks out undervalued shares of midcap companies, generally with a market value of $2 billion to $10 billion. Westport's strategy doesn't focus on dividend payouts, instead emphasizing a company's potential for capital growth.
Nicklin, who has managed the Westport, Conn.-based fund since 1997, notes that the forward curve in the energy futures market rises progressively, suggesting higher oil prices ahead.
That, he said, bodes well for Anadarko Petroleum Corp., EOG Resources Inc. and Forest Oil Corp., which have strong records for adding to their oil and natural gas reserves.
Nicklin said he expects demand for natural gas to rise at the expense of coal, as the incoming Obama administration has signaled tougher environmental policies. He said the companies have strong North American assets, which is attractive at a time when so-called resource nationalism has driven some international companies out of overseas operations.
Anadarko, one of the world's largest independent oil and gas exploration and production companies, had reserves equal to 2.4 billion barrels of oil at the end of 2007. Based in The Woodlands, Texas, the company has sizable U.S. oil and natural gas holdings, and promising prospects in Brazil and Ghana, Nicklin said.
Houston-based EOG Resources is one of the nation's largest independent oil and gas companies, with 85% of its output in natural gas and 67% of its gas reserves located in the U.S. Forest Oil, based in Denver, has natural gas holdings throughout North America.
Nicklin said the fund doesn't hold any other commodity-linked companies, and he sees crude oil and natural gas markets recovering when the economy improves.
He noted that when oil prices surged in the shocks of the 1970s, vast new production in the North Sea and on the North Slope of Alaska came on line. In the most recent runup, "nothing close to that much new supply has come on."
"What we see today is not the future," he said, referring to crude oil prices hovering around $40 a barrel, and noting that he expects them to average closer to $50 next year, and higher beyond that. "Unless the downturn is much longer and the economy is depressed longer term, it's safe to say we'll see an increase" in oil prices, he said.
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