Hedge Fund Industry Thinks Low Cost of Crude Will Lead to Decline in Alternative Energy Efforts & Fracking in U.S.

April, 2016 – As the markets continue to grapple with a prolonged period of historically low oil prices, investors have been keeping a close watch on the energy sector in search of the best investment opportunities. Given the energy sector’s influence on markets around the world, for the second year in a row The New York Hedge Fund Roundtable surveyed its membership about the energy sector and the importance of oil’s role within it.

Opportunities and risks in today’s energy markets was the topic of the Roundtable’s April meeting, where featured panelists Chris G. Carter, a managing partner with Natural Gas Partners; Stewart Glickman, an energy equity analyst with S&P Capital IQ; Rob Santangelo, a managing director at Credit Suisse; Stephen Schork, editor of The Schork Report; and moderator Gregory Zuckerman, a special writer for The Wall Street Journal and author of “The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters,” each weighed in on the topic.

“The world woke up to the fact that the U.S. doubled [oil] production and that’s created a glut,” said Carter, summarizing the biggest factor that caused oil prices to plummet and why they remain low. “We should get used to the idea that this is going to be a slow boil higher,” he said. Of course, not all panelists were in agreement on how the energy markets will behave moving forward. While panelists have varied opinions on how the energy market will rebound, all were in agreement that the low price of oil has created opportunities for savvy investors.

“The producer is now holding a record short position in crude oil,” said Schork, adding that he believes there will be such significant consolidation within the sector that by 2018 there will be as many people working as waiters as there are now people working in factories and mills. “This is an industry that still has a humongous amount of stupidity in it and you are going to see firehouse sales,” he said. His sentiment was shared by Natural Gas Partners’ Carter, who estimates that about 10% of companies specializing in oil production have access to financing, while the remaining 90% do not and are in varied level of distress –a factor he believes has many investors patiently waiting on the sideline for bankruptcies so they can ultimately snap up the assets they want at bargain prices.

Roundtable members believe the decline in the price of crude oil will diminish U.S. efforts to find alternative sources of energy. 68% of respondents to the Roundtable’s latest survey said they think the low price of crude oil will lead to a decline in alternative energy efforts and fracking in the U.S., compared with 49% of respondents who were asked this same question a year ago; while 32% of respondents think the drop in the price of crude oil will not have any impact on alternative energy efforts or fracking, compared with 51% of respondents a year ago.

“From the types of cars people drive, to the price of electricity and even foreign policy, the impact of the price of oil is far reaching and cannot be understated. So it is no surprise that the alternative investment industry has been so actively investing in crude oil, whether it is through long term investments or short positions,” said Timothy P. Selby, President of the New York Hedge Fund Roundtable and a partner at Alston & Bird. “And it is interesting to see how the industry’s perspective on crude oil has changed over just the past year when it comes to specific issues such as how the cost of oil will impact alternative energy efforts.”

New York Hedge Fund Roundtable members had the opportunity to weigh in on the energy markets at the Roundtable’s most recent event, as well as through an online electronic poll.

*Of the respondents to this survey, 25% were fund managers; 22% were allocators; 7% were risk management or trading; 39% were service providers; and 7% were other industry participants.

Following are some of the other key findings of that survey:

  • When asked how they believe the prolonged period of lower oil prices will impact that alternative investment industry, 56% of respondents said they think it will create more opportunities; 28% think that if oil prices remain low much longer it could become problematic for hedge funds that have taken large long-term positions in futures and option contracts for crude oil; and 16% think hedge funds are likely to begin shorting crude oil again.
  • Asked whether they believe energy independence or lower oil prices are more important for the economy’s long-term growth, 78% of respondents chose energy independence, compared with 80% of respondents who were asked this same question a year earlier; while 22% chose lower oil prices, compared with 20% of respondents last year.
  • Asked to predict what the cost of a barrel of crude oil will be by the end of 2016, 0% of respondents think it will rise above $70, compared to 7% of respondents asked this same question a year ago; 0% think it will be in the $60 to $70 range, compared to 21% last year; 28% think it will be between $50 to $60, compared with 29% last year; 66% think it will be between $40 and $50, compared with 22% last year; and 6% think it will fall below $30 per barrel, compared with 1% last year.
  • When asked what type of energy companies will provide the best investment opportunities for the alternative investment industry in 2016, 38% of respondents selected renewable energy companies, compared to 32% of respondents to this same question a year ago; 19% chose independent oil and gas companies, compared to 29% last year; 13% picked pipelines, compared to 15% a year ago; 30% selected large oil and gas companies, compared to 14% a year ago; and 0% selected oil field services and offshore drillers, compared to 10% a year ago.
  • Asked which country will be the largest consumer of oil over the next decade, 52% of respondents said China, compared to 63% of respondents asked this same question a year ago; 16% said India, compared to 24% last year; 29% said the U.S., compared to 12% last year; and 3% said Russia, compared to 1% last year.

April’s “bonus” question: With baseball season officially upon us, Roundtable members were asked what their favorite stadium snack is. It seems times have changed, as only 3% of respondents said that peanuts and Cracker Jacks are their favorite stadium snack. Instead, 52% of respondents said hotdogs are their favorite snack; while 35% said they prefer to drink their snacks in the form of beer; and only 10% said popcorn is their favorite.

About The New York Hedge Fund Roundtable:

The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers. Monthly events center around thought-provoking speakers and panels designed to keep members apprised of timely and important issues within the alternative investment industry. The Roundtable’s goal is to provide a forum for thought leadership, where industry professional have the opportunity to enhance their knowledge and skills and to network with other individuals committed to advancing the industry with the highest ethical standards. For additional information about the Roundtable, visit: http://www.nyhfr.org

 

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