Market Commentary
Rafi G. Tahmazian - EnerVest Natural Resource Fund Commentary
Rafi Tahmazian
Summer 2011
Thursday, June 30, 2011
At the midpoint of the year, the Fund has continued to perform very well, outperforming the Index with returns of 12.4% compared to (1.2%) for the S&P/TSX Capped Energy Total Return Index (the “Index”).
The energy sector has continued to be very volatile, with ongoing negative macro driven events weighing on the market, such as European debt problems, and the Chinese and U.S. economies. Concurrent to the market correction in early spring, we began to realize profits in a few of our core holdings, and are currently reviewing opportunities for the deployment of this capital.
We anticipate a number of Exploration and Production (E&P) entities operating in the Western Canadian Sedimentary Basin will report weaker than expected second quarter results due to the extremely wet spring/summer season and forest fires in the region.
More importantly, many E&P companies are behind on their 2011 capital programs, which we expect to benefit an already dynamic service sector during the second half of the year. Any additional operating delays or an increase in natural gas prices will only further add to cost increases which E&P entities are currently experiencing. As such, at the end of the quarter, the Fund has invested approximately 34% of invested capital in the service sector.
Despite our present cautious stance, the Fund is selectively adding to its E&P Producers position. Specifically, large and intermediate entities which are reasonably valued, provide strong near-term growth and necessary liquidity, will likely be first movers should the energy sector rally after its recent pullback. To this end, the Fund will continue to focus on the cash flow generating capabilities of many of the oil weighted entities in the current price environment, as well as those entities which are exposed with significant economic natural gas drilling inventories.