Earlier in the year we wrote that we expect OPEC to do a deal at some point, but that ‘these agreements always take longer than we expect.’ To be clear, we are not convinced that this is ‘the’ deal; from our perspective we were anticipating that OPEC members would need to experience greater fiscal pain and that we had not yet reached the point of capitulation.
And for varying reasons, this appears to be the consensus viewpoint. The one over-arching response to OPEC’s announcement to reduce supply, has been universal scepticism. In theory, this means that if investors are sceptical, then they have positioned themselves accordingly – ie they remain underweight energy.
If OPEC is able to formulate and implement a mutually agreeable deal, then the upside is substantial. As Peter Harper at BetaShares highlighted in a recent email : ‘After the 2008 (OPEC) cut, the spot oil (WTI) increased from a low of $32 a barrel to approx. $81 over the following 12 months.’ If we add this to the fact that many investors remain underweight, then any deal could see a significant re-rating.
At Katana we see Woodside (WPL) as the safest way to gain exposure to the potential upside – ie without exposing ourselves to the balance sheet risk and double edged operating leverage that other oil stocks offer. If we were certain that this is ‘the’ deal, then we would be barrelling into Santos or the like, which provide greater leverage to a rising oil price. However, given our pre-occupation with capital preservation, we have at this juncture chosen the more sedate path.
Katana Asset Management (AFSL Number 288412) was founded in September 2003 as a boutique investment management firm specialising in Australian Equities. In September 2005 Katana Capital Ltd, an ASX listed investment company (ASX code KAT), engaged...
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