By Dave Brown – Exclusive to Oil Investing News

On April 12, 1959 President John F. Kennedy delivered a speech in Indianapolis, where he suggested, “When written in Chinese the word crisis is composed of two characters.  One represents danger, and the other represents opportunity. Since then, other presidents, business consultants, and authors have employed this trope routinely in speeches, books and even in testimony before the U.S. House of Representatives Energy and Commerce Committee, by Al Gore in his Nobel Peace Prize acceptance speech.

Inflationary prices of food and basic commodities have created tremendous political risk and global social unrest which has resulted in a sharp increase in the price of oil. This dynamic and unfolding “crisis” is also providing an opportunity for some companies, and investors should be increasingly careful in considering future potential.

Portfolio composition

An issue which energy investors should be aware of is maintaining optimal sector exposure, both in terms of natural gas versus oil and secondarily between junior exploration and more senior production companies.  In an exclusive interview with Oil Investing News, Bob Sewell, President and Chief Executive Officer of Bellwether Investment Management indicated, “While higher oil prices may result in some increase in natural gas prices, the reality is that natural gas supply is so abundant with additional supply coming on line regularly we don’t see this imbalance resolving itself anytime soon. As producers shift their focus to oil and reduce their drilling for gas that supply/demand imbalance should start to resolve itself.” Going along with this investment thesis, Mr. Sewell favors juniors and major producers that are more heavily levered to oil production and exploration versus natural gas. “Juniors that we like are Bankers Petroleum (TSE:BNK) , BlackPearl Resources (TSE:PXX), Petromineralis (TSE:PMG) and Crew Energy (TSE:CR).” As far as the larger producers Mr. Sewell prefers Suncor Energy Inc.(TSE:SU), Talisman Energy Inc. (TSE:TLM), Canadian Natural Resources Limited (TSE:CNQ) and in the United States, he favors exposure to Hess Corp. (NYSE:HES) and Chevron (NYSE:CVX).

Opportunity exists

Chief Executive Officer of Grafton Asset Management and oil and gas fund manager, Richard Grafton, contends that the present context provides strong opportunities for smaller oil companies to obtain exposure to more international assets at reasonable prices. Mr. Grafton indicated that “What actually happens in these types of environments [is that] barrels of oil become available. We’ve been shown three different opportunities between 5,000 and 15,000 barrels a day.” The oil fields are generally owned by big producers that may decide to over weight their exploration efforts and capital to other regions, which means shedding non-core assets. “It’s the old 80-20 rule,” says Mr. Grafton, whereby the majors “look at their top 20 per cent of assets and they want to spend 80 per cent of their money on them.”

By exposure to smaller independent producers, Mr. Grafton expects higher growth potential with less downside risk and sensitivity to price declines than major producers. His experience has created an analytical framework, “that’s [based from] 30 years of financing mid-cap, juniors and startup oil and gas companies. They grow faster. They don’t get as much access to debt, so their balance sheets are less risky. And they’re more nimble. They take advantage of opportunities.”

Geographic diversification

Thirty percent of Mr. Grafton’s energy growth fund portfolio are Canadian domiciled firms that maintain interests and international assets ranging from South America to the Caspian basin. The top holding is currently attributable to about 20 percent of total assets and represents interests in Colombia, which he regards as relatively stable from a regional political perspective, and generating opportunities for consolidation and ambitious oil expansion plans. Additional companies obtaining his interest have exposure to Peru, Brazil and Argentina. Other countries on his acceptable-risk list include Oman, Azerbaijan, Kazakhstan, Syria and even Egypt. Investors will note as a matter of caution that he is currently not interested in any commercial enterprise in Libya, Nigeria and other African trouble spots. A number of top holdings include Gran Tierra Energy (TSE:GTE), Parex Resources Inc. (CVE:PAR) and Greenfields Petroleum (CVE:GNF.S).

Limited downside risk

If oil drops back to $80 a barrel as Mr. Grafton expects, when things calm down, then he anticipates “this is just creating more opportunities.  We are in a super-commodity cycle. We are going to be supply-constrained and demand-driven. So energy is going to continue to go up, … We’re going to see a lot of Canadian independents grow into significant companies on an international basis.”