Energy Fund Manager Highlights Oil Storylines To Watch

By Luke Geiver | January 20, 2016


This week we caught up with a team of investment advisors with a unique tie to the Bakken. Split Rock Private Trading manages investment portfolios, including an energy fund, that at various times, has been tied to the Williston Basin. We profiled the company and its story in a feature piece last year.

Although Tyler Kocon, portfolio manager, and his team are still running their energy fund, their funds’ exposure and link to the Bakken is not as strong as it once was due to the negative impact of low oil prices on publically traded unconventional energy producers or related companies.

We talked with Kocon on a wide-range of topics, including which storylines the team is watching in the oil price saga. At the time of our conversation, the sanctions on Iran had not yet been lifted. Like most analysts, Kocon is focused on how many barrels Iran will bring to the global oil supply. With global supply roughly 1.5 million barrels more than current demand, more oil in the market has many analysts continuing their hesitancy to proclaim any change in oil prices. Kocon also said he is watching the back- and-forth between Saudi Arabia and Iran. The two countries could actually keep prices low by fighting for market share, an effort that would cause each to sell oil for lower than the other.

“The other concern is if we saw a contraction of China slowing down or a growing recession. No one really talks about that and that is a concern for us,” he said. That being said, Kocon still believes there will be a market turnaround in the latter half of 2016. The global oil market could find a way to absorb the oversupply through production reduction in certain places, including the U.S.

China, the world’s second largest consumer of oil, is a wildcard to watch, he said. During two of the past three U.S. recessions, oil demand continued to rise through the economic recessions, a point that could mean oil prices will once again rise. But, the main reason for oil demand growth even during distressed times was China.

The other wildcard to watch is breakeven prices, Kocon said (The oil price that producers can still turn a profit at). It seems to be constantly changing due to efficiency gains or cost cutting measures installed by the producers. Six months ago, some companies were saying $60 oil was the new $90 and at $60 oil they could keep drilling and completing new wells. For Kocon, the question now is this: is $40 the new $60?

“There are clearly companies that can’t make money at $30 or $40 oil,” he said. “But there are also companies that can.”

Another element of the oil price story not often cited is the role of the U.S. dollar. “Does that play a part?” he said. “You bet.”

Because oil is priced in U.S. dollars, when the value of other currencies is far decreased from the dollar, it costs more to purchase oil. Kocon is watching to see if the U.S. Federal Reserve raises interest rates this year. When that happens, the U.S. dollar typically strengthens. And, if that happens, any gains made in the price of oil could retract.

Currently, Split Rock’s energy fund team prefers the Permian and Eagle Ford firms due to their proximity to gulf coast refining and the possibility to reach export markets. The lack of pipelines connecting the Bakken to the same markets Texas producers can reach continues to be a roadblock for Kocon and his team to consider some Bakken entities.

However, low oil prices are presenting an opportunity for Kocon and his team to potentially get into some Bakken or other unconventional producers or tech companies, he said. “Nothing is permanent. These pullbacks present opportunities.”