The $50 Billion Oil Bear

By KEN BROWN at The Wall Street Journal

Being a bear can be lonely. That’s not Shawn Driscoll’s problem.

The natural-resources fund manager at T. Rowe Price believes we are in a 10- to 15-year bear market in energy and commodities. He has positioned his own $5.2 billion in assets largely against a rise in prices. So far that has worked out well.

Mr. Driscoll’s influence extends far beyond his own funds, making him one of the most important, if unknown, energy bears in the market. T. Rowe Price collectively has about $50 billion invested in energy and natural resources across its diversified stock funds. Many fund managers at the firm, impressed by Mr. Driscoll’s conviction and detailed historical work on commodities markets, have followed his advice.

That gives Mr. Driscoll lots of company. And pressure.

T. Rowe Price, which had $765 billion in assets at the end of the first quarter, has bet its own future on the ability of fund managers to beat the market. A big bet for or against a major sector can reverberate across the firm.

At the end of the first quarter, the firm’s 70 stock funds, with $382 billion in assets, had just over half of the market’s 6.8% weighting in energy. That is a big negative bet for a major mainstream firm.

As oil tumbled from $100 to just over $30, Mr. Driscoll was a genius. Oil has since rebounded to nearly $50. “I just don’t think we should be here,” he said, calling it a cyclical rally amid a grim long-term trend. “We’re looking at this as hope trade No. 2 in a long bear.”

The basis for Mr. Driscoll’s bearishness is rising productivity in commodities production, which reduces costs and pushes producers to drill more. Couple that with fast turnarounds in shale drilling, new near-shore projects in places like Norway and rising production in Iran and other countries, and supply will stay strong for years.

“We always say when the productivity ends, that’s when we get bullish,” Mr. Driscoll said.

Today’s near $50 price is already enticing companies to start drilling again, and Mr. Driscoll expects that to continue. It is a classic prisoner’s dilemma among energy companies. Being the first to start a new well is a sign to investors that a company believes it has the lowest costs. And drilling first allows the company to reap the benefits of low costs from contractors who are desperate to put assets to work. “We think we’re very close to incentive pricing, that’s why rigs are coming back,” he said.
Then there are unexpected projects coming online in the near future such as the Johan Sverdrup oil field in near offshore Norway. Unlike projects in deep water or hostile environments, this field sits less than 100 miles from the headquarters of Statoil, which will be one of the field’s operators.

Mr. Driscoll runs the $3.3 billion T. Rowe Price New Era Fund, the firm’s 47-year-old natural-resources fund, which he took over nearly three years ago. While he sits in the top 25% of his competitors, the fund has lost an average of nearly 2% a year for the last three years. Assets are down by roughly a quarter since he took over.

“We’ve prepared ourselves for what the bear market would be like,” he said. “But living through it is a lot tougher.” Decades ago, some of his predecessors fought long bear markets by buying things like health-care stocks, but today clients would howl if a manager veered from his mandate.

The fund has stayed active, buying on dips such as last week when Mr. Driscoll, from vacation in Florida, picked up shares of European oil companies after energy prices fell. They sold out of heavily indebted companies when high-yield markets started to tumble and bought specialty-chemicals makers.

He was on the wrong side of a big rally in refiners. “It took every strand of my being not to chase that,” he said. But this year the fund rode the oil rally and is up 17.5%, well ahead of the overall market and more than 2.5 percentage points ahead of his peers.

Mr. Driscoll’s bigger responsibility is to T. Rowe Price’s other fund managers, and he is paid in part on the impact his advice has on the firm. With money pouring out of actively managed funds, T. Rowe Price has held up well compared with the rest of the industry.

The next big test for the bear case is coming up as the oil market gets closer to supply-and-demand balance. If demand outstrips supply, as many investors believe, oil is likely to surge above $50 a barrel. Mr. Driscoll said new supply, plus all of the oil in storage, will keep prices low.

Going against the crowd has been fun so far. “Ask me again in a few years,” Mr. Driscoll said. “I do think bear markets have a way of grinding people down.”

Source: The $50 Billion Oil Bear - WSJ

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