On Friday, September 23, the McCombs School will be hosting an alternative investment conference that will include panels on Real Estate, Private Equity, Hedge Funds, and Energy. I will be moderating the session on Natural Resources, which will include the following distinguished panelists:
- Greg Beard, Senior Partner, Apollo Management , L.P.
- Ron Hulme, Chief Executive Officer, Parallel Resource Partners
- Rob Jones, Co-Head Global Commodities, Bank of America Merrill Lynch Commodities
- Marc Lipschultz, Global Head of Energy and Infrastructure, KKR
- John Ritter, Director, Energy & Natural Resources, Teacher Retirement System of Texas
In this blog post, I'll preview some of the issues that will be discussed with the hope that readers will help refine and suggest additional issues for discussion.
First let’s review some facts that are critical to any discussion about investing in energy. In terms of market capitalization, energy is roughly 10% of the U.S. market. Perhaps more importantly, close to 40% of CAPEX in the U.S. was in energy related investments in 2010. As illustrated in the figure below, this quantity, which includes pipelines, LNG terminals, power plants, transmission, drilling rigs, etc., has grown substantially over the last 10 years. As a result, it’s likely that there are more investment professionals specializing in energy than in any other industry group.
For investors, energy offers diverse investment opportunities, requiring them to make judgments about the opportunities and risks that they want exposure to, as well as the vehicles through which they gain that exposure. For example, institutions, like pension funds and endowments, can gain direct exposure to oil and gas by acquiring reserves through private equity funds, or by entering into positions in derivatives. Investors also gain exposure to oil and gas prices by buying portfolios of exploration and production companies and integrated energy companies.
The first question that I intend to raise in the panel concerns the extent to which investors should be exposed to energy and other commodity investments. As a benchmark, consider an investor with a diversified portfolio of equities and fixed income investments.
- Is such an investor under-weighted in commodities?
- If the answer is yes, can they simply increase their exposure by putting more weight into energy and other commodity related stocks?
- Or is there a special role for derivatives or direct acquisitions of reserves and private equity investments that make them particularly appealing for institutional investors?
Since the investors in our audience represent endowments as well as pension funds, and large as well as small institutions, it would be interesting to know whether the answers to these questions depend on the attributes of the specific investor.
I expect that the panelist’s answers to these questions will depend on their outlook regarding these markets. Panelists who foresee $200 per barrel oil in 2015 are likely to recommend different allocations than panelists who foresee $50 per barrel oil. I am particularly interested in how the panelists think about the relative prices of oil, natural gas, and electricity. In terms of energy content, natural gas is currently about one-third the price of oil.
- Is this price difference likely to be sustainable?
- What are the implications of relatively cheap natural gas for electricity prices?
- How will the outlook for natural gas and electricity prices influence the development of alternative technologies like wind and solar?
Finally, I would like to learn more about the panelist’ opinions regarding investing in major capital projects, like power plants and refineries.
What issues would you like to see this panel address? Please share your thoughts in the Comments.