TER: Are you worried about the conflict in Iraq?
BH: That is something we factor in, but Gulf Keystone is working in the north, where it is safer. At some point the dust will settle, and we will get production out of Iraq and Kurdistan. Therein lies the opportunity. If you take a long-term view and buy assets when nobody else wants them, they are cheap. That is how you can create alpha—by investing within the context of a portfolio so you're not buying a large chunk. You only need to buy a small amount of a stock like Gulf Keystone for it to make an impact.
TER: Any names closer to home that you like?
BH: We used to own Raging River Exploration Inc. (RRX:TSX.V). We almost doubled our money, so we took profits as we entered the second quarter, which seasonally can be a little slow for the juniors. We will look to reload on that name as we get into the fall, and in other names as well.
TER: The Raging River stock price really went up in the last six months. What was pushing that?
BH: We have seen a resurgence in the junior space in Canada, which has been neglected for the last two or three years as development in the U.S. shale plays have taken hold. Now we are seeing a bit of a handoff back to Canada. Horizontal drilling is developing in the Montney and Duvernay formations, and we're seeing companies operating there rise to the top. They are starting to do very well with their own unconventional drilling. We have seen value unlocked, and it's very exciting. A number of companies in the sub-$1B or $500 million market-cap range are starting to grab hold.
TER: What other contrarian opportunities do you see out there?
BH: Large oil equipment and services companies are an opportunity. Companies like Schlumberger Ltd. (NYSE:SLB), Halliburton Co. (NYSE:HAL) and Baker Hughes Inc. (NYSE:BHI) are bundling up smaller companies to provide a one-stop shop. That is attractive.
Pressure pumping prices are starting to move up. On the drilling side, more rigs are being contracted into the Permian Basin. A company like Patterson Energy Inc. (NASDAQ:PTEN) should benefit from that. A smaller operator, such as the Canadian drilling company CanElson Drilling Inc. (CDI:TSX.V), also has exposure to the Canadian sands and the Permian Basin. It is benefiting from those two growth areas.
Moving down the market cap spectrum, Xtreme Coil Drilling Corp. (XDC:TSX) is doing quite a bit in the Eagle Ford. Higher-spec coil tube drilling is starting to catch on down in that area. I recently returned from a site visit with Xtreme Coil in the Eagle Ford, and it looks like the company is doing quite well. Xtreme recently announced it is going to expand its XSR coil tubing fleet in the U.S. by six additional units, costing $54M.
TER: The Global Resources Fund (PSPFX) was up almost a percent for the first three months of 2014, after a couple of negative years. It's tilted strongly toward oil and gas. Is that part of a strategy to move toward energy stocks?
BH: We are overweight in oil and gas. We have some conviction in that area, and we feel like there's more running room. We've shifted at the margin, but we're holding steady. We're in an environment where we might see more volatility in the summer months due to instability overseas, so we are keeping a little bit of dry powder.
TER: Do you have any advice for readers looking to adjust their energy portfolios going into the rest of 2014?
BH: I would focus on the shale plays; the companies in the core regions within these plays. There are opportunities in the juniors—in the small- and mid-cap spaces in North America—that should continue to do well. There are probably attractive opportunities overseas as well, so keep an eye out for those. Overall, it's going to be a very constructive environment for energy investing.
TER: Thanks to you both.
Frank Holmes is CEO and chief investment officer at U.S. Global Investors Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company's funds have earned many awards and honors during Holmes' tenure, including more than two dozen Lipper Fund Awards and certificates. He is also an adviser to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Holmes coauthored The Goldwatcher: Demystifying Gold Investing (2008). Holmes is a former president and chairman of the Toronto Society of the Investment Dealers Association, and he served on the Toronto Stock Exchange's Listing Committee. A regular contributor to investor education websites and a much-sought-after keynote speaker at national and international investment conferences, he is also a regular commentator on the financial television networks and has been profiled by Fortune, Barron's, The Financial Times and other publications.
Brian Hicks joined U.S. Global Investors Inc. in 2004 as a comanager of the company's Global Resources Fund (PSPFX). He is responsible for portfolio allocation, stock selection and research coverage for the energy and basic materials sectors. Prior to joining U.S. Global Investors, Hicks was an associate oil and gas analyst for A.G. Edwards Inc. He also worked previously as an institutional equity/options trader and liaison to the foreign equity desk at Charles Schwab & Co., and at Invesco Funds Group, Inc. as an industry research and product development analyst. Hicks holds a master's degree in finance and a bachelor's degree in business administration from the University of Colorado.