Interview: Leewood Hedge Fund
>> oil price back on the rise, in fact, climbing above $61 a barrel in today’s session. and the latest increase in prices comes at hand of hurricane dennis which shut down an estimated 96% of production in the gulf of mexico. could prices rise further as hurricane season continue as soon as brendan kyne with leewood hedge funds which invest in the energy industry says prices could go as high as $70 in the near term. he joins us from our bureau in toronto to tell us why. welcome.
>> good to be here. thank you. why are we seeing prices for crude oil?
>> i think today’s action was indicative of the risks inherent in the market . you saw a lot of hurricane- related activity, take out of a large platform which i believe is listing in the gulf of mexico. the close proximity of another tropical storm which i think is being upgraded to a hurricane emily. this is a time of year where disruptions in gulf production happen fairly frequently. this on the back of a very tight supply-demand scenario for global crude markets . it has added seasonal uncertainty.
>> what do you do in an environment like this where you see price swings of many dollars a barrel within one, two days?
>> i think as a hedge fund investor with directional bias on the up side towards oil prices and oil stocks, our view really right at this point in time is to establish our long- term trajectory positions which is positively biased and trade around those positions during upward movements where the rationality of the price gets excessive and to add when the bearish sentiment rallies up, and we saw that during the april and may time frame when a lot of market strategists called the market incorrectly during the shoulder season switch from distillates to gasoline refining. it was an excellent buying opportunity.
>> if you set yourself up for higher prices, how high do you think the crude prices are going?
>> we think longer term crude prices move up. we are in agreement with matthew simmons in terms of his view, the energy technician. i think it must be mindful of seasonal biases both in the spring and fall when there are switches in terms of refinery demand moving from gasoline to distillates or back and forth. as we enter the fourth quarter when the international energy agency expects global demand to surge we think that at price of crude is anticipating it at this point in time given the price deck that we are seeing. we think any uninterrupted or any interruptions that appear in the crude market whether a disruption in nigeria, venezuela and terrorist-related activities and storm damage could see the price of crude surge dramatically during the fourth quarter on a temporary spike with the top around 70 in our opinion.
>> if we hit that $70 number, you are saying that’s the top. what do you think would happen at that point?
>> i think there’s always a scramble whenever you have something that exceeds expectations. i think the stocks will react positively. we think a spike to that level or magnitude would be short lived. our view is the trading range for oil is between $50 and $60. i think that’s the rational price level. i believe it will be higher in 2006. for the next six months, that’s where we are at.
>> i mentioned going into the last commercial break that the s&p energy index is at a new record high. given how much we have seen the stocks appreciate, where are you finding value or where are you finding opportunities right now?
>> well, it’s a matter of consensus really because the investment community in the united states and canada is modeling the price of oil for 2005 around 47.50 appearing to be consensus. spot price in excess of that, the average price strain the first half of the year was 51.86. in order to meet the 47.50 price level for the year average, we have to average in the low 40’s for the second half. that will be difficult with the price of crude above that. we think the net income is a raising in the price forecast that analysts are using into the mid 50 range of 2005 that. will raise the estimate in cash flows and revenues for those companies and bring valuation ranges into more reasonable territory. we think from an overall longer term perspective that the stocks have a long way to go. but they have to be traded. let’s be honest, it’s a commodity-related sector with seasonal trends that are favorable and unfavorable.
>> anything in particular that you are avoiding, any particular pockets?
>> we really like energy service a lot. we think there’s some subsector monopolies there. we are pricing on the up side. almost unlimited in terms of what the customers will select given the bloated price of oil and gas to begin with. we think natural gas is a huge story as well. natural gas pricing today in north america is at all time record highs. to some extent the natural gas story has been hidden. the oil price has been an exciting area and a place for investors to focus on. natural gas stocks, the pryinging in gas is incredible and shows little if any signs of weakness. i think the price of gas is up robustly on the fact that we’re having a warm summer in reflection to 2004 and 2003 which run seasonably cool. the second factor is the western coast snow melt in canada and california and oregon and washington was very low meaning reservoirs in the west coast did not fill to capacity. the amount of hydroelectrical production coming out --
>> we will run into our commercial. thank you for joining us.
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Listen Market briefing --- Ellen (slow)
NYSE --- Deb (fast)
Pepsico --- June (slow)
after the bell.” i’m ellen braitman. 30 after the hour. let’s recap the day on wall street where the s&p 500 rose. investors speculate aing second quarter profit will be stronger than forecast. benchmark exceeding this year’s highest close in the last hour of trading. then retreated closing at 1,2122. stocks held back, however, as oil prices closed above $60 a barrel. the dow, as you see, just losing shy of four points. let’s go to deborah kostroun at the new york stock exchange to get an update in terms of activity we saw.
>> thanks, ellen. we did see stocks closing just a little lower. really kind of saw the rally fizzling out a little bit. look at n.c.r. lower all day. as we talk about earnings, the world’s largest maker of automated teller machines forecast 1.40 to 1.45 a share. five analysts expected 1.46. that stock a little lower. as we talk about earnings, pepsi reported better than expected profit. in fact, pepsico said their second quarter earnings rose to 70 cents a share, exceeding the 67-cent analyst expected number. this is a $15 billion market cap company and a broad array of businesses like g.e., also a proxy for the economy. perhaps as you look at hotels, tobacco and most importantly also insurance. not very often that we get to talk about that in the business report. we’ll talk about it now, though. forest labs was higher. maker of celexa. gained after a stroke drug based on vampire bat saliva would be ready for regulatory approval by 2007. that company was raised to a buy by smith barney. back to you in the studio.
>> ok, deb. thanks so much. also making news today, credit suisse first boston banker frank quattrone appealing his conviction of obstructing a probe into csfb. in the first day of oral arguments, his attorney cited a supreme court ruling that overturned the conviction of the accounting firm, arthur andersen. he argued that the may 31 ruling reinforced claims that jurors should have been told that quattrone could be convicted only if he intended for subordinates to destroy documents he knew the government wanted. quattrone will argue that the judge in his trial barred him from offering evidence that would have proved his innocence. quattrone is trying to reverse a conviction that may send him to prison for as long as a year and a half. in another courtroom, bernie ebbers denied a motion for a new trial. u.s. district judge barbara jones making the ruling. ebbers was sreubgtd of conspiracy, securities fraud and filing false statements with the s.e.c. in the $11 billion accounting fraud at worldcom. federal prosecutors recommended he receive life in prison and his sentencing is scheduled for tomorrow. let’s turn to corporate news right now. pepsi’s second quarter earnings rising 13% topping estimates. june grasso has more on what drove the earnings.
>> hi, ellen.
>> a surge in demand for non- carbonated drinks. quaker foods in the u.s. led net income at number two soft drink maker to climb. pepsico shares rose as much as 2.5% on the earnings news. net income climbed to $1.19 billion or 70 cents a share from 61 cents a share a year earlier. three cents above analyst estimates.
>> once again the company beat expectations. there was concern going into the quarter about competitive activity from the coca-cola system as well as impact from rising oil prices from frito lay. they weathered the storm once again.
>> the product diversification allowed the company to post double digit earnings growth over the past several years. revenue for quaker foods soared at 16% in the second quarter led by oatmeal which pepsico marketed as healthy for consumer frito lay snacks revenue grew 6% because of higher sales of lays, cheetos and tostitos lines. north american beverage sales rose 4% because of gains for aquafina and propel. sales of soft drinks declined. they expanded gatorade in markets including china and boosted promotions for the merinda soft drink brand in argentina and international sales jumped 15%.
>> it is key. it’s more than 30% of their business. growing high teens. growing more than 20% from a profit perspective this quarter. you will continue to see strong double digit growth from the business.
>> pepsico sales have risen an average of 7.5% the past five years compared with 2.3% for coca-cola. it’s pepsico’s lead in selling non-carbonated drinks. the chief executive said he will boost market spending for beverages in north america in response to coke’s plan to raise spending by $400 million.
>> you take the beverage side of things it looks like pepsico is funding more coupons to respond to what coke is doing. one thing interesting about the coupon sincere they’re mail-ins.
>> mail-ins are intended to drive volume with coke and pepsi hoping they won’t get redeemed. 15 rate pepsico as a buy and three as a hold. the stock has added 4.5% year to date. back to you.
>> thanks so much. in terms of market activity today, we saw energy stocks rise. we saw the s&p energy index reaching a new record high today. coming back, we look at energy sector. please stay with us.
