August 11, 2011 / 5:25 PM / 8 years ago

Fund view: How oil veteran Grafton learned to love volatility

TORONTO (Reuters) - Market volatility is usually a tough pill to swallow but veteran energy financier Richard Grafton welcomes it because it can serve up buying opportunities as he hunts for high-growth energy stocks.

The chief executive of Grafton Asset Management said on Thursday that for his year-old Absolute Resource Energy Growth Fund, he seeks out small oil and gas companies that are likely to be takeover candidates eventually.

Calgary, where he is based, is a hotbed of corporate creation, Grafton said, with many successful entrepreneurs starting oil companies, building and selling them, and then starting again.

In an interview on a day when Toronto’s main stock market index dropped 3.4 percent, he said that, “I find this type of volatility gives me opportunities. It’s taken me a long time to like volatility but I like volatility.”

“There’s a number of companies... (that) are trading at values, where if I don’t buy them, someone else will.”

He said the biggest risk to his outlook is not the price of oil, which on Thursday sank nearly 6 percent to below $87 a barrel. “I don’t think that’s a risk. Volatile yes, but risk, no,” he said. “The risk on these companies is always operational.”

In his search fro high-growth companies, Grafton said he is “country agnostic” though he sees South American countries such as Colombia, Brazil, Argentina and Peru as fertile ground.

South American exploration will likely last the next 30 to 50 years as demand for oil will continue to rise, particularly in emerging markets, he said.

“The world needs oil. We produce 85 million barrels a day and we consume 85 million barrels a day. The curve on consumption is a growth rate of anywhere between 1.5-3.5 percent a year.

“That is all coming from the emerging markets. This is not a new story, but it’s real and it does happen.”

He declined to talk about overweight and underweight positions in the fund, saying that he balances the risk of the 30 to 40 companies in the portfolio based on his own criteria.

That means he looks for companies that have reserves that are at least 20 percent proven and producing and that have experienced management teams.

Among Grafton’s holdings in the portfolio are Tourmaline Oil Corp. (TOU.TO), Athabasca Oil Sands Corp. (ATH.TO), and Surge Energy SGY.V, which represent conventional oil, oil-sands and natural-gas plays in the Western Canadian Sedimentary Basin, mainly Alberta.

In Colombia, a growing market, he favors Pacific Rubiales PRE.TO, Parex Resources PXT.V, and C&C Energia CZE.TO. The fund also has some exposure to Turkey and to some former Soviet republics. Twenty percent of the fund’s holdings are in private and pre-IPO companies.

RETIRE OR DO SOMETHING

During a career that has spanned more than 30 years, Grafton was one of the co-founders of independent energy-focused investment bank FirstEnergy Capital, and has completed more than C$22 billion of energy investment deals.

Just 58 now, he had contemplated retirement, but decided in 2009 to set up the fund instead.

“I had the option to play golf in Scottsdale or invest in high-growth early-stage oil and gas companies. Already a lot of my personal assets were invested in these companies.”

The Absolute Resource Energy Growth Fund has returned 53.31 percent since inception, far outpacing the broad S&P/TSX Composite Index, which was up 17.76 percent in the same period. It also outperformed its benchmark, the S&P/TSX Capped Energy TRI, which was up 19.18 percent.

It hit a few bumps in the second quarter, with a negative return of 9.83 percent though that was still good enough to beat the broader index, which fell 10.96 percent.

He is sanguine about the hit — perhaps owing to his enthusiasm for yoga — and explains that the second quarter is usually the softest period of the year for commodities as the winter drilling season is winding down and choppier stock prices seem to prevail among high-growth energy companies, which also tend to have little news to share.

Also, his philosophy is to try to hold investments until bigger companies want to buy them.

“I’m a long-term holder of securities. I know that the end buyer is out there. Someone will buy this company for a lot more money.”

($1=$0.98 Canadian)

Reporting by Ka Yan Ng; editing by Peter Galloway

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