On their web site GMO states that they manage client assets “using a blend of traditional judgments with innovative quantitative methods to find undervalued securities and markets.”
Recently, Granthan has become a fan of the oil & gas companies. The sector weighting history of his portfolio shows that he has been increasing his oil & gas holdings since the third quarter of 2010. He also added more of these companies than any others in the most recent quarter. They now comprise 8.7% of his portfolio.
In his most recent shareholder letter, Grantham discussed what he foresees as the future of oil. What he mainly anticipates is shortage and rising prices. “The transition from oil will give us serious and sustained problems. We passed peak oil per capita long ago and we are within 30 years, possibly within 10, of peak oil itself. The price will be volatile beyond our wildest dreams (or nightmares), and the price trend will rise, although at times this will be difficult to discern through the volatility.”
There are many different predictions of when peak oil (the point at which petroleum extraction reaches its maximum) will actually occur.
In November 2010 the International Energy Agency (IEA) released its World Energy Outlook which concluded that peak oil already came and went in 2006, at 70 million barrels per day.
However, under the agency’s scenario, crude oil prices would rise to $113 per barrel (in year-2009 dollars) in 2035 – up from just over $60 in 2009. At the same time, demand would surge to 99 million barrels per day by the same year – 15 million more than used in 2009.
If governments fail to encourage more efficient oil use or research alternatives, the agency paints a dire picture: “Demand will continue to increase, supply costs will rise, the economic burden of oil use will grow, vulnerability to supply disruptions will increase and the global environment will suffer serious damage.”
BP (BP) research has found the opposite – the company actually reports in its Statistical Review of World Energy 2011 that while individual countries vary, estimated proved oil reserves worldwide are increasing. According to its data, proved world oil reserves for 2010 were 1383.2 thousand million barrels, compared to 1376 thousand million barrels in 2009. It also says that total world consumption rose 3.1% in 2010 from 2009, and more in the Asia Pacific – 5.3%.
Warren Buffett agrees with the probability of an upcoming dearth of oil. He told NBC in 2008 that, “Oil is finite, there’s actually some school that says it isn’t, but I think it’s finite. And we have 500,000 producing oil wells in the United States, the average production in 11 barrels per day. 500,000 times we’ve actually hit, but if you look at our production versus 30 years ago its way down, and most fields are depleting at a pretty good rate. With demand, if demand grows 1 million or 1.5 million barrels a day from year to year and the present fields deplete and we don’t find the elephants in the future, who knows what the equilibrium price will be.”
Crude oil prices have fallen $12-$15/bbl since early August, due to government debt concerns. For 2011, oil demand has declined 0.1 mb/d and world oil supply rose by 0.6 mb/d in July from June, to 88.7 mb/d. Production in Canada is offsetting lower production in the UK.
But world oil demand and world oil supply dropped in the second quarter of 2011 from the previous quarter. In the second quarter, world production was at about 87.5 mb/d, and demand was at about 88 mb/d. Oil production has fallen each quarter since the fourth quarter of 2010. Supply has been rising steadily since early 2009, until it fell by about 1.25 mb/d in the second quarter of 2011 from the previous quarter.
Grantham bought or added to his stakes in 22 oil & gas companies in the second quarter, and he owns many more.
Grantham’s five largest oil & gas buys and adds in the second quarter are: Exxon Mobil (XOM), Petroleo Brasileiro SA (Petrobras) (PBR), Suncor Energy Inc. (SU), Petroleo Brasileiro SA ADS A (PBR.A) and Canadian Natural Resources Ltd. (CNQ).
Exxon Mobil (XOM)
Exxon Mobil Corporation's principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacturing of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. Exxon Mobil Corp. has a market cap of $339.57 billion; its shares were traded at around $68.03 with a P/E ratio of 9 and P/S ratio of 0.9. The dividend yield of Exxon Mobil Corp. stocks is 2.6%. Exxon Mobil Corp. had an annual average earnings growth of 9.1% over the past 10 years.
Grantham bought 1,731,672 shares at an average price of $82.34 and now has 11,309,048 shares.
Petroleo Brasileiro SA (Petrobras) (PBR)
PETROBRAS-ADR C is an integrated company operating in exploration, production, refining, retailing and transportation of petroleum and its byproducts at home and abroad. Petroleo Brasileiiro Sa Petrobras has a market cap of $97.6 billion; its shares were traded at around $26.96 with a P/E ratio of 6.5 and P/S ratio of 0.8. The dividend yield of Petroleo Brasileiiro Sa Petrobras stocks is 0.6%. Petroleo Brasileiiro Sa Petrobras had an annual average earnings growth of 20.2% over the past 10 years.
Grantham bought 2,077,700 shares at an average price of $35.13 and now has 5,730,262 shares.
Suncor Energy Inc. (SU)
SUNCOR ENERGY is a world leader in mining and extracting crude oil from the vast oil sands deposits of northern Alberta. Suncor Energy Inc. has a market cap of $48.16 billion; its shares were traded at around $31.3 with a P/E ratio of 11.1 and P/S ratio of 1.5. The dividend yield of Suncor Energy Inc. stocks is 1.4%. Suncor Energy Inc. had an annual average earnings growth of 14.5% over the past 10 years.
Grantham bought 1,150,684 shares at an average price of $41.45.
Petroleo Brasileiro SA ADS A (PBR.A)
Petrolo Brasilerio was founded in October of 1953 to operate in the Brazilian oil sector. with a P/E ratio of 5.9. The dividend yield of Petroleo Brasileiro S/a Ads A stocks is 0.7%. Petroleo Brasileiro S/a Ads A had an annual average earnings growth of 37.1% over the past 10 years.
Grantham bought 1,307,400 shares at an average price of $31.44 and now has 7,003,584 shares.
Canadian Natural Resources Ltd. (CNQ)
Canadian Natural Resources Limited is a senior independent oil and natural gas exploration, development and production company based in Calgary, Alberta. Canadian Natural Resources Ltd. has a market cap of $37.85 billion; its shares were traded at around $35.34 with a P/E ratio of 18 and P/S ratio of 2.6. The dividend yield of Canadian Natural Resources Ltd. stocks is 1%. Canadian Natural Resources Ltd. had an annual average earnings growth of 20.5% over the past 10 years. GuruFocus rated Canadian Natural Resources Ltd. the business predictability rank of 2.5-star.
Grantham added 786,379 shares at an average price of $43 and now owns 853,379 shares.