LONDON Allianz Energy is targeting oil companies developing cost-effective, repeatable processes in the shale industry rather than those investing in complex one-off projects that are vulnerable to cost inflation.
"Historically, the oil industry was about producing one-off projects of pretty high complexity," said Christopher Wheaton, manager of the Allianz Energy Fund, which has some 145 million euros under management.
"I'm trying to find companies that go down a manufacturing-style route, giving you lower unit costs, higher cash flow and higher profits."
Wheaton, speaking at the Reuters Global Energy and Environment Summit, cited Plains Exploration & Production PXP.N, Pioneer Natural Resources (PXD.N), EOG (EOG.N) and Concho Resources (CXO.N) as examples of companies with repeatable processes.
"With U.S. shale oil plays you can drill the same wells over and over again. And given where oil prices are, you're making fantastic returns," he said.
He contrasted this with oil companies that had been tripped up by the rising complexity of their projects, highlighting the ballooning cost of ENI's Kashagan project in the Caspian Sea.
Energy sector share prices have underperformed the broader market this year, hammered by falling oil prices and risk averse investors, who steer clear of the more growth-oriented segments when the economic outlook is poor.
The Allianz Energy fund is down 6.74 percent in the 12 months to end-April, according to Lipper data, but has beaten its peers in the Lipper Global Natural Resources segment by 6.61 percentage points.
Wheaton, who sees relatively little downside left in crude oil prices, is focusing on companies with specific "franchise" advantages. He cited Saipem SPM.MI, a sub-sea engineering company, as an example of a holding operating in a segment with very few competitors.
"It's a growth market, and there are high barriers to entry because it's very technically complicated. That's a good place to start looking for supernormal returns," he said.
Suncor Energy (SU.TO), a Canadian oil sands company, is liked because of its geological franchise. "It has some fantastic rocks with decades worth of reserve life," he said.
He also cited long-term holding WesternZagros (WZR.V), a Canadian small cap which is making progress in Kurdistan. The exploration hit rate there is 78 percent, whilst the stock market won't price exploration risk above one in four.
"I am trying to stack the odds in my favour by buying exploration risk that is three times mis-priced," said Wheaton. "I've owned this stock for almost five years and it is finally coming right - it's drilling wells and finding oil."
He said there had been a scramble by oil majors to get into Kurdistan, which should spark a decent re-rating. This follows a disappointing experience for the oil majors in Iraq, where Wheaton sees little opportunity for Western companies to generate significant value per barrel from future exploration.
"Now the oil majors have woken up to this and gone to the north, where they can make significant-sized discoveries, the security situation is a lot better, and there's a chance of getting exports out of Kurdistan to Turkey."
Wheaton was phlegmatic about a possible escalation of tensions with Iran. Although stocks with investments in Qatar could be hit, he sees this as a buying rather than a selling opportunity.
The fund is about 5 percent invested in Total (TOTF.PA), which has a stake in a big LNG project in Qatar and could be hit by any possible blockade of the Strait of Hormuz.
But Wheaton thought the Iranians would find it difficult to keep the Strait closed for more than four or five hours. "Stock markets would react very quickly, but the actual impact on trade flows would be pretty minimal," he said.
(Editing by William Hardy)