Online Extra: Tim Guinness' Global Energy Watch

The fund manager explains why China is an essential part of the forecast for oil, and he offers his favorite international picks

After he sold his money-management firm to Investec in 1998, Tim Guinness decided to reinvent himself as an energy-fund manager. He took over an offshore energy fund, which sowed the seeds for the $8 million Guinness Atkinson Global Energy Fund, one of the best-performing funds this year, with a 25% gain. Based in London, Guinness considers himself "one-quarter American" since he attended the Massachusetts Institute of Technology. BusinessWeek Personal Business Editor Lauren Young recently caught up with Guinness. Edited excerpts of their conversation follow:

Q: What's your investment style?

A:

This is the clone of a $500 million offshore fund I run for Investec. The core of the portfolio is held in 27 equally weighted holdings. I regard that as giving me a great advantage. I don't have to worry about 50 or 70 companies. When I was at MIT, I got it into my head that if you wanted to reduce stock-specific risk, 20 stocks would do it.

I'm also a value investor. One of things this fund offers investors through owning a diversified portfolio of companies in exploration and production, refining, and marketing is that we're not so different from an Exxon, but we're about 30% cheaper.

Q: Why are you so bullish on energy?

A:

For most of periods I've run the fund, I've been in the camp that believed that the nature of the oil and gas market have changed. The big picture is that oil is running out. Not everyone believes that. There's a simple way of thinking about it. Worldwide use so far is up to about a trillion barrels today. We've got about 1 trillion in reserve, and we've still got 1 to 2 trillion to find. We're now consuming these barrels at a rate of 85 million per day, so we're using 1 trillion barrels every 30 years at the current rate.

Once you've consumed half of any material, it gets very difficult to increase production after that. Oil consumption growth rose so fast from 1950 to 1970 when we adopted the motor car. China and Asia are in a similar period -- motor-car consumption is taking off. China is at the stage America was at 1910. There's one car for every 600 people today in China.

That's a simple version of what's going to drive a much higher rate of growth in demand. Where is the supply going to come from? That means higher oil prices.

Q: So what companies are poised to benefit from higher oil prices?

A:

I focus on North American exploration and production companies, such as Apache (APA ) and Anadarko Petroleum (APC ). I also focus on Canada. About 20% of the fund is now invested in Canada.

The interesting thing about Canadian oil companies is that they have quite high production costs. To extract oil from frozen bitumen north of Alberta costs $24 per barrel. When the price of oil is $40, it's a perfectly reasonable proposition. Canadian companies I like are OPTI Canada, Canadian Oil Sands Trust, and Canadian Natural Resources.

Q: Anything else beyond Canada?

A:

I own one central European stock. It's OMV, Austria's largest gas and oil company. Unlike many of my companies, it's not so heavy in exploration and production. It's more in refining and marketing. Austria is well placed geographically to serve the emerging economies of Eastern Europe.

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