Who is Robert Rodriguez?
If you are not familiar with Robert Rodriguez, he is the CEO of FPA Advisors and manager of FPA Capital Fund. During the past 20 years, his fund averaged 12.85%, outperforming S&P500 by more than 5% a year.
Robert Rodriguez uses absolute value screen to pick stocks for his portfolio. When he cannot find stocks, he is willing to park funds in cash. This was proved in the years of 2007 and 2008, while he froze buying and had more than 50% of money in cash.
As a bottom up investor, Robert Rodriguez seems to have good understanding on the overall market valuation and sector allocations. In 2007 he had only 3% of his portfolio in financials, and more than 30% in energy stocks. The indicator he used was the ratio of sector total market cap relative to sector GDP. He said: “Financial service stocks represent nearly 22% of the S&P 500 and 28% of its earnings. If one adds in the financial subsidiaries of GE, GM and others, it is quite easy to get the financial share of the S&P 500’s earnings above 30%. This segment’s profitability is at risk.” (see: Robert Rodriguez's Perspective on Financial Stocks and Sub-Prime Loans )
Here we like to point out that Warren Buffett uses total market cap relative to GNP as the indicator of the overall market valuation. We have developed an Broad Market Valuation Indicator, which shows that the market is probably modestly undervalued at current level.
He wrote in 2006: “the financial-services sector currently represents over 22% of the S&P 500. After nearly 25 years of interest-rate declines and the explosion in financial derivatives and questionable lending practices, we prefer to be invested in energy rather than in financial services.” This has helped Robert Rodriguez avoided the loss in financial stocks.
Energy is by far the most weighted sector
As Robert Rodriguez discussed many times in his shareholder letters and speeches, he is very bullish with energy sector and heavily weighted in energy stocks. Since 2005, he has had energy as his largest holding, and his fund had a terrific run with the energy stocks. This is a recap of what he wrote about energy stocks over the past few years.
Experiences With Energy Stocks in 1979, Reduced Exposure From Over 40% to 3%
Robert Rodriguez: We remain very optimistic toward the outlook for energy prices. Before discussing why, I would like to take you back many years into an earlier part of my career. It was 1979, the Iran/Iraq war was taking place and oil was approaching $40 per barrel. There were many “experts” who were calling for $100-per-barrel oil within ten years. I had the good fortune to participate in a high-level corporate meeting at a former employer, where the longterm outlook for energy prices was discussed. At the conclusion of that meeting, the firm’s senior energy analyst concluded that oil would likely be at $80 in ten years. I asked a simple question as to what might be the effects of this forecast on our life, property and casualty, and consumer finance operations, should he be correct. At the end of this discussion, it was estimated that nearly 90% of the company’s operations would probably be bankrupt before we even reached the ten-year mark. My associate and I walked out of that meeting and began selling our energy holdings the following day since, if our company experienced this bankruptcy scenario, this outcome would have serious negative implications for the economy. Over the next two years, we reduced our investment exposure from over 40% to nearly 3%, just before I left the company. I revisit this period because, during this discussion, supporting documentation was presented that indicated oil production would not peak for at least another 25 to 50 years. I never forgot that chart.
After Almost 20 Years, Robert Rodriguez Revisited Energy Stocks and Bought First Energy Stock Since 1981
Robert Rodriguez: In 1997, I began pondering how the long-term outlook for oil consumption and oil prices may have changed since that fateful meeting nearly 18 years earlier. One would think that, after all this time, energy companies and investors should have a better understanding of the situation. It appears that this was generally not the case, since oil prices and share prices were low and heading lower. In thinking about this, I began to realize that, fundamentally, nothing had really changed, in that no major new fields had been discovered and that consumption had continued to grow. At the beginning of 1998, my associate, Dennis Bryan and I, began a search for an energy analyst. We were very fortunate to have found and hired Rikard Ekstrand. He joined us at the beginning of 1999 and our first energy investment entered the portfolio two months later. This was my first investment in energy since 1981. The point in reviewing this is that we consider energy to be a strategic investment area for us. We expect it to be a large percentage of your Fund for many, many years to come and, therefore, we tend to look through the short-term price variations of our holdings. If share prices rise too rapidly, we may trim a portion of our holdings, but if they decline, we will add to them, aggressively.
Why We Are So Positive About Energy Stocks
Robert Rodriguez: Why are we so positive? Despite the price runup in energy stocks during the past five years, this sector represents barely 10% of the S&P 500. This is up from a low of approximately 5%, but it is down from the 1979 peak of over 30%. Notice that the energy sector topped out at a level that was very close to where the technology sector peaked in 2000. Though it has been a strong performer these past five years, its significance, as a percentage of the major averages, is still substantially less than other periods when a sector has become “the” sector to own.
Oil Prices in the Past Century
Robert Rodriguez: When I entered the investment industry in 1971, worldwide oil consumption was approximately 45 million barrels per day versus 84 million today. The last major oil fields to be discovered were in 1968 at Prudhoe Bay , Alaska and the Shaybah offshore field in Saudi Arabia . We are on the verge of doubling consumption and yet, there have been no other major fields discovered. In the case of the Shaybah field, production began in 1998, so this has helped Saudi Arabia to maintain its daily production. After nearly forty years of searching, with the most advanced technology available and no major fields to show for it, does this not raise a question as to the likelihood of a continuation of low-cost energy prices? Between 1933 and 1970, the price per barrel of oil increased at approximately a 10% compound growth rate, from 10 cents to $3.39. With huge oil discoveries in the 1930s, 40s and 60s, oil prices were low and controlled by the U.S. For many of these years, the price was maintained between $1 and $2 per barrel. With the peak in U.S. oil production in 1970, the world entered a new era. Between 1970 and 2006, oil prices have grown at about an 8.6% annual rate. Much of this rise has occurred in short time periods. As demand grew into the available supply, oil prices began to escalate. For the entire 73-year period, oil prices have grown at approximately a 9.3% annual rate. Given that there have been no major oil discoveries since the late 1960s, this raises the question of what might the rate of growth be in oil prices going forward. If we are to be conservative, possibly a 5% growth rate might be appropriate. This would be a little more than half the rate of growth for the last 73 years. If this were to occur, a barrel of oil would cost approximately $100 in ten years. For consumers not to experience an increase in their energy spending as a percentage of total spending, either their incomes have to grow in line with energy prices or they will have to reduce their energy use. Either way, this could affect the nature and growth of the economy considerably.
World Oil Production May Have Reached Its Peak
Robert Rodriguez: In the case of supply, within the next five years, three countries may reach a peak in oil production: Mexico , China and Russia . Several analysts estimated that Mexican oil production would likely peak around 3.4 million barrels per day and that this event would occur in 2004. Mexico ’s largest oilfield, Cantarell, appears to have peaked and if this is the case, so has Mexican oil production, since six of every ten barrels produced by Mexico comes from this one field. Earlier this year, a 3% decline rate was forecast for Cantarell’s production. This has proved incorrect since it is now estimated that the decline rate is 8%. Obviously, this is likely to be of some concern to Mexico . Should this forecast of peak oil production for these three countries be correct, an additional 35% of non-OPEC oil production will have peaked, and together with the 41% from eleven major countries and others that have experienced a peak in production rates, 76% of non-OPEC oil production might have peaked by 2012. If this occurs, it will give the middle-eastern countries even more clout in the setting of oil prices. This is not a pleasant thought.
As for the possibility of Saudi Arabia and OPEC riding to the rescue, there is a major debate occurring within energy circles as to whether they will be able meet rising oil demand. Saudi Arabia says that they will have no problem meeting incremental oil demand for years to come. They estimate that they have over 250 billion barrels of reserves. This estimate has not changed since 1988, despite their producing over 3 billion barrels per year for nearly twenty years. Saudi Aramco, the Saudi state oil company, has acknowledged that its gross depletion rate is now approaching eight percent. If true, Saudi Arabia needs to bring on 800,000 barrels per day of new oil production each year to offset declines in existing fields. Several OPEC nations appear to have already peaked in their production capabilities. We wonder whether the margin of safety is as great as what Saudi Arabia would have us believe. The last independent audit of their reserves was done nearly thirty years ago and at that time, their reserves were estimated to be 110 billion barrels. It does raise a question.
The Energy Sector Will Remain a Strategic Investment Area for Us
We view the energy sector as both a store of value and a hedge against a future inflation. It is one of the few sectors where we believe the underlying fundamentals will continue to improve despite the worldwide economic contraction. With worldwide oil depletion rates of 9% annually for those fields past peak and U.S. natural gas first-year production decline rates of between 30% and 50%, these trends should be supportive of energy prices longer term.
Again, within three to five years, we believe oil prices will be back above $100 or even higher than $150 per barrel. Our recent asset deployments reflect our typical strategy of being “out of step” with the general consensus, especially with an energy exposure that is nearly 50% of all of our equity holdings.
We deployed more capital than at any other period in the last 25 years, late last year and early this year, with 67% directed into energy stocks. This added to FPA Capital Fund’s hefty energy exposure that existed prior to the market collapse. Over 50% of the Fund’s equity investments are currently in energy.
The Worry on National Debt and Inflation
I estimate that by the close of 2011, Treasury debt outstanding will be between $14.6 and $16.6 trillion and that the U.S. debt to GDP ratio will rise to between 97% and 110%. By comparison, the highest ratio ever attained was 121% at the end of WW2. Furthermore, my estimates do not include entitlement liabilities or the effective guarantee of trillions of dollars of Fannie Mae and Freddie Mac obligations. Treasury debt service will likely rise by 50% to 100% above the present $450 billion rate and this is with interest rate levels near record lows. A critical question is, “How do we finance all this debt?” Assuming consumers save an additional $650 billion in 2009, we will still be more dependent on foreign sources of financing. Should foreign investors retain their present amount of Treasury debt ownership and then let it increase proportionally to our debt growth this year, additional purchases between $719 and $862 billion are required versus last year’s $724 billion. This appears doubtful, given the deterioration in their domestic economies along with rapidly declining exports. To make up the difference, the Fed will be forced to print an additional $800 billion to $1.5 trillion of new money to buy these bonds. Unless Americans increase their personal savings per my estimates and foreign investors boost their Treasury ownership by 39% to 57% between 2009 and 2011, the Fed could be forced to print additional money. This possibility may unnerve some of our trading partners, particularly the Chinese and the oil exporting countries.
The New World Order
We have skewed our research toward companies that will benefit from what I believe to be the beginning of a “New World Order.” In my opinion, the old economic order began at the end of WW2 and ended in 2007. Mercantilist nations in Europe, Asia and other parts of the world operated with the strategy of having a cheap currency that made their exported goods attractively priced for a financially sound and unleveraged American consumer. With the recent collapse of the American consumer’s over-leveraged balance sheet, a new era has begun. Foreign countries will have to restructure their economies to emphasize domestic growth so as to offset the structural reduction of U.S. demand for their exports. China has already begun this process. If my outlook is correct, many sectors of the U.S. economy will be negatively affected. Active managers will have to make some hard choices as to how they deploy capital going forward.
Robert Rodriguez did make some mistakes with his stock picks, mostly in retail sector. He had Circuit City and Fleetwood Enterprises, which went bankrupt, he also had other retailers which became penny stocks. He and his associates wrote: “ Though we were correct in forecasting that the credit crisis would spread into credit cards, auto loans, leveraged loans and commercial loans from the mortgage sector and that it would continue into 2009, your Fund’s performance for 2008, a negative 34.8%, and the six months ended March 31, 2009, negative 33.7%, would not appear, at first glance, to reflect that we had any success protecting your assets from the carnage of this stock-market collapse.”
Robert Rodriguez owns varieties of energy companies, which include oil & gas producers and distributors. Here we discuss some of the largest holdings.
ESV - ENSCO International Inc.
ENSCO International Incorporated is an international offshore contract drilling company that also provides marine transportation services in the Gulf of Mexico . The Company's complement of offshore drilling rigs includes jackup rigs nine barge rigs platform rigs and one semisubmersible rig currently under construction. The Company's operations are integral to the exploration development and production of oil and natural gas.
Robert Rodriguez reduced Ensco slightly during the second quarter, probably due to fund redemptions. ESV accounted for more than 9% of his total portfolio. ESV is traded at its 2005-2006 prices, well before oil hits its all time high. ENSCO International Inc. has a market cap of $5.09 billion; its shares were traded at around $35.9 with a P/E ratio of 4.5 and P/S ratio of 2.1. The dividend yield of ENSCO International Inc. stocks is 0.3%. ENSCO International Inc. had an annual average earning growth of 12.8% over the past 10 years.
PTEN - PattersonUTI Energy Inc.
Patterson is one of the leading providers of domestic land drillingservices to major & independent oil & natural gas companies. The Company focuses its operations in Texas & southeast New Mexico . PTEN is a long term holding of at least 5 years.
Robert Rodriguez has been accumulating PTEN through all these years, his cost base should be higher than the current price. PTEN is about 8% of his total portfolio. PattersonUTI Energy Inc. has a market cap of $2.05 billion; its shares were traded at around $13.35 with a P/E ratio of 6.7 and P/S ratio of 0.9. The dividend yield of PattersonUTI Energy Inc. stocks is 1.5%. PattersonUTI Energy Inc. had an annual average earning growth of 26% over the past 10 years. GuruFocus rated PattersonUTI Energy Inc. the business predictability rank of 2-star.
RDC - Rowan Companies Inc.
Rowan Companies Inc. is a major provider of international and domestic offshore contract drilling services. The Company also owns and operates a manufacturing division that produces equipment for the drilling mining and timber industries.
RDC is about 7% of his portfolio, it is now traded at its 2002 prices. Rowan Companies Inc. has a market cap of $2.12 billion; its shares were traded at around $18.77 with a P/E ratio of 4.3 and P/S ratio of 1. Rowan Companies Inc. had an annual average earning growth of 10.9% over the past 10 years
NFX - Newfield Exploration Company
Newfield Exploration Company explores develops and acquires oil and natural gas properties primarily in the Gulf of Mexico. The company plans to continue to expand its reserve base and increase cash flow through the exploration and development of existing properties and the acquisition of proved properties with drilling upside. Newfield Exploration Company has a market cap of $4.32 billion; its shares were traded at around $32.58 with a P/E ratio of 10.4 and P/S ratio of 2. Newfield Exploration Company had an annual average earning growth of 19.1% over the past 10 years. GuruFocus rated Newfield Exploration Company the business predictability rank of 4-star.
Newfield is now the 4 th largest energy holding of Robert Rodriguez, accounting for about 6% of the portfolio. Robert Rodriguez started buying Newfield in the fourth quarter of 2008. He might have more than 50% of gain since then.
For the complete list of Robert Rodriguez’s energy portfolio, go to: