Interview: Senior portfolio manager with Gartmore Global Investments
>> the oil slide continues. prices fell to a three-month low. heating oil and natural gas tumbled in response to what some traders called a tame inventory report. joining us to talk about the supply-demand issues and impact on energy stocks is bill gerlach, senior portfolio manager with gartmore global investments, whose global natural resources fund is up 67% in the past year, beating 96% of its peers. good afternoon, bill.
>> hi, lori.
>> i’d like to get your opinion on moves we saw in large cap energy names today despite the fact that crude oil futures fell slightly and energy prices are lower than they were a month ago. why did we see such big moves in shares of exxon and chevron today?
>> i think there were two things encouraging to the energy market . one, the distillates were not down as much as people expected. they were pretty much in line. the crude and gasoline builds were very explicable. also, investors are worried oil would fall substantially below $60 and that has not occurred so all in all, it was a great day for energy stocks.
>> let me ask you, though, get back to distillates, are you concerned that declines in heating oil inventories came in despite milder temperatures?
>> it was relatively cold last week. the market sold off yesterday on the crude side as well as the distillate side due to the notion that it was 70 degrees in new york and liable to be warmer than usual in the east coast for the coming seven to 10 days but in terms of the stocks, the fundamentals are veryrally very good. frankly, the risk to energy investors and energy company stocks is substantially higher energy prices. our fear as we saw after hurricanes katrina and rita, that we began to see demand destruction as oil hit $75, gasoline hit $3.50 at the bump. $60 is great for companies although a tax on consumers. for the company’s perspective, it’s much better than $. 70 or $75-a-barrel oil.
>> with crude oil below $60 for three days, do you see stabilization here?
>> from our perspective, the price is important but what we are more concerned about is demand to keep prices at relatively this level. with our g.d.p. up 3.8% in the third quarter despite the hurricanes, chinese third-quarter g.d.p. was 9.4%. japan is finally, after 15 years of lackluster economic performance, seemingly finally back on its feet, we think that and india set the stage for robust energy demand over the next 12 to 24 months to help keep prices and profits up. the risk on the consumer side is that $60-a-barrel oil is too much of a tax and we’ll get a chance to see that this winter as people experience several hundred dollars more costs in heating their homes with heating oil or natural gas. that’s a risk to the consumer, but probably not so much in the energy stocks.
>> we were talking off the top here about the significant move―higher moves in some of the big cap integrated names but the gartmore global resources fund is made up of mid and small cap names, is that correct?
>> that’s correct.
>> could you explain the strategy?
>> our perspective is, in a high-priced oil and natural gas environment, we want to own companies that offer volume growth, they can grow the amount of oil and natural gas they’re selling on a quarterly annual basis. the problem with investing in major oil companies is most of their growth is international and most of that international growth is tied up in what are called production sharing agreements where after a certain price, somewhere typically between $25 and $35 a barrel, any excess price goes to the host oil company whereas in the u.s., particularly for north american natural gas companies, all of that money flows back to the company so if i can get a high price for the commodity and production growth ethen―then i win both ways.
>> you told us your favorite companies, burlington resources. shares up over 66% year to date. do you see room for gains?
>> burlington is a special situation. i use that as an offset to owning a major like exxon or conocophillips. but, yes, burlington grows production about 6% a year but their cash flow is enormous. they use it to buy back stocks. on a per-share basis, they’re growing production north of 10%. other companies i like are warren resources and parallel petroleum. they’re very―relatively inexpensive companies with legacy assets from which they grow production on a stable basis and emerging plays. for parallel, that’s the barnett shale and the wolf camp play in new mexico. for warren resources, that’s the wilmington town lot and strangely enough, in long beach, california, as well as the wsh ashsh&r block ashcachei basin in wyoming. if prices are high and given the activity we’ve had in the gulf, there are two sorts of companies we want to own. one are the jack-up rigs that provide drilling services by way of renting drilling rigs in coastal waters under 300 feet. companies there include enso, rowan and hero.
>> thanks so much for that.
>> thank you very much.
>> once again, bill gerlach of gartmore global investments. interest rates are rising and commodities are falling. what’s the link between the fed and commodities?
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>> stocks rallied for the third day in four. also, the s&p 500, now, up for the year, just slightly, though, up .2%. leading today’s rally, you see media stocks, of course, that on time warner’s earnings. homebuilders putting in an impressive performance after beazer homes released earnings. you have to remember that the homebuilders, since july 20, the bloomberg home building index, down 17% so getting a really good lift today. semiconductors performing quite well and of the 24 industry groups in the s&p 500, semiconductors leading the way and transports closing at a record high in today’s session. the transports led by many of the airlines. airlines upgraded by bear stearns. you also saw many other stocks like many of the railroad stocks performing quite well. remember that old theory about the highs in the dow transports. richard moroney, editor of the news newsletter on the dow theory said a record close in the dow transports doesn’t predict the bull market . moroney says the dow would have to close above the march high of 10,940, which would then signal more gains. helping out the transports, the fact that crude oil is actually down 15% since its record on september 1 and in fact what you did see, at least in today’s session, oil services were high even though oil, natural gas and heating oil, all lower in today’s session. semiconductors once again leading the rally in the s&p 500. the s&p semiconductor and semiconductor equipment index having its biggest gain in nine months. media stocks gaining after time warner reported its profit exceeded analysts’ estimates and also broker/dealers. remember, the financials, they comprise 1/4 of the s&p 500. goldman sachs at its highest in five years and merrill lynch at its highest since june 2001. i’m deborah kostroun at the new york stock exchange.
>> duke energy third-quarter profit fell 89%, partly because of its wholesale power business. the electric utility had to take a big charge against earnings in order to write down the value of that unit. duke also cites the value of its energy contracts. the company locked in lower prices by selling future production. but since natural gas prices kept rising, the losses added up. so, duke earned just four cents a share but if you strip out all the charges, duke posted a profit of 56 cents a share, which is eight cents ahead of analysts’ estimates. duke also said earnings for the year would come in ahead of wall street forecasts. shares of duke energy ended the day up 47 cents or 1.75%. cigna had its worst day in three years. shares of the health insurance provider were down 6% or $7.18 a share. as a result, the stock is back where it was in august. today’s selloff was fueled by a negative earnings surprise. cigna says profit may fall next year. analysts had been looking for a 7% increase. in a conference call with investors, chief executive ed hanway says sigma―cigna is suffering from lingering hangover from membership declines in the last four years. during that time, the company boosted profits by increasing premiums and getting rid of unprofitable customers. now cigna wants to increase its membership. earnings reports from crossed in the after-hours’ session. qualcomm out with its third-quarter numbers as well as prudential financial and priceline.com. we head to our stocks desk for details with ellen braitman.
>> talking about qualcomm, fourth-quarter results, 32 cents a share excluding items, a penny shy of what analysts were expecting. however, you see shares rising. that’s on the first-quarter forecast. what qualcomm is saying, it sees earning 36 to 38 cents a share for the first quarter. analysts on average currently at 35 cents. for the sales forecast for the first quarter, the company says it should come in as high as $1.77 billion. on average, analysts are closer to $1.66 billion. recapping the fourth-quarter numbers. profit up 37% to 32 cents a share. if you exclude items and the revenue coming in the $1.56 billion. interesting to note, with that sales figure for qualcomm for the fourth quarter, seeing the biggest revenue increase in five quarters. this is the second biggest maker of cell phone chips and back on september 21, it raised the forecast for the fourth quarter, that quarter being reported today. because it increased royalties in the u.s. as well as brazil. being helped in particular by phones, videos and sales in emerging markets . shares down 5% year to date. i’ll have an interview tomorrow with qualcomm c.e.o. paul jacobs during the 1:00 show. we’ll talk in more detail about the company’s forecast. going through the other earnings, for prudential financial. this, keep in mind, the second biggest u.s. life insurance company. $1.46 a share, looking at a pretax adjusted operating income. analysts on average looking for $1.16, shares up 4.1% in extended trade. the company says that for the full year, it anticipates earning $4.95. analysts, on average, $4.56 a share. shares of prudential financial rising in extended trade. looking, as well, at priceline.com. third-quarter results, 47 cents a share, excluding items. a dime better than analysts’ expectations. the company says it will buy back up to $50 million in shares and sees the full year beatingmentlysts’ estimates. on average, analysts looking for $1.26 a share.
>> thank you. oil prices fell to a three-month low but energy stocks were higher. oil drillers and some of the integrated names led the way. does that mean the market ‘s about to turn? we’ll talk about that divergence with bill gerlach.
