George Soros is one of the best investors on the planet.
In 1973 he founded the Quantum Fund, and also over the next 2 decades Soros went on to generate a 30% compounded annual return. Because of that kind of performance, he has cemented his place one of the world\’s greatest investors.
Because of his exceptional history, I always pay close attention to what stocks Soros is buying. And at this time he\’s making some interesting bets around the Canadian energy sector. Allow me to explain-
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In recent quarters, Soros has been bullish on oil. That\’s probably why he has built huge stakes in the likes of Transocean and Devon Energy. These names are leveraged bets on higher energy prices along with a good experience an oil patch recovery.
He also just picked up several new positions. Buried in the recent SEC filing, Soros disclosed big stakes in a number of oil sand companies including Suncor Energy Inc., Cenovus Energy Inc., and Canadian Natural Resources Limited.
As regular readers know, oil sand investors are learning a tough lesson in leverage. Squeezing crude out of Alberta\’s bitumen deposits is costly. Producers need to dig up a lot of tar and muck, then run the mixture through expensive processing facilities.
Because of these high costs, producers operate on razor-thin profit margins. When oil prices rise, their thin margins, together with share prices, can soar. But when oil prices fall (as they have recently), this leverage works the other way.
Another big fear is the fact that a socialist NDP government is shaking up Alberta politics. Throughout the election campaign, Premier Rachel Notley vowed to review oil industry royalties, raise corporate tax rates by 20%, and break the rules against pipeline construction. With some calling for an Iron Curtain to surround the province, energy investors are nervous.
Soros, however, is using the pullback like a buying opportunity and i believe it would be wise to follow in his footsteps.
Here\’s the problem: the average cost to make a barrel of oil in The united states is well above today\’s levels. You do not need an MBA to crunch these numbers. At current rates, energy outfits are losing money on almost every drop of crude they haul from the ground.
That\’s precisely why the current situation won\’t last. Small drillers will go bust; large producers will cut back production. Eventually, dwindling supplies will place a floor underneath prices.
This is just another example of the classic resource cycle. Based on a research note from Wells Fargo, there has been four prior instances in which the price of oil has been halved since 1980. Each time, crude prices recovered 70% in the bottom after one year on average.
Blue-chip stocks, like Suncor, Cenovus, and Canadian Natural Resources, are a great way to play a recovery. Due to the leverage inherent in their businesses, shares could rise even faster than underlying oil prices. And given that these are a few of the largest resource firms in the country, they have the dimensions and scale to survive the industry\’s current doldrums.
The smart money is betting on Alberta; in the event you buy, too?
But here\’s a word of warning: the smart cash is starting to catch on.
According to recent SEC filings, a number of hedge fund managers, including Ken Griffin, Ray Dalio, and Jim Simons, happen to be building positions in oil sand stocks. Especially, famed value investor Warren Buffett also boosted his stake in Suncor captured.
Now, I have to ask, What might have these money mavens so excited? I\’d say it could only mean something: they visit a huge rally ahead.
Fool contributor Robert Baillieul doesn\’t have position in almost any stocks mentioned. The Motley Fool owns shares of Devon Energy and Wells Fargo.
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