Dynamic’s Stevenson Buys Trilogy in Shale Bet: Corporate Canada

Jennifer Stevenson, whose Dynamic Strategic Energy Class Fund has beaten 91 percent of its peers this year, is buying shares such as Trilogy Energy Corp. in a bet on surging North American shale-oil output.

Companies like Trilogy, Noble Energy Inc. and PHX Energy Services Corp., which are linked to unconventional shale oil and liquids formations, have the best potential for gains among energy stocks, said Stevenson, in an interview in a Calgary cafe on Oct. 1. Companies producing in the Eagle Ford area of Texas as well as Alberta’s Duvernay are among the holdings in the Dynamic Strategic Energy fund, she said.

“The growth in the shale plays, especially in the U.S., has been one of our important investment themes,” said Stevenson, 45, who helps manage about C$100 billion ($96 billion) in assets at Dynamic Funds, a division of GCIC Ltd., which is a unit of Toronto-based DundeeWealth Inc. “A lot of these companies are big growth plays.”

Production of shale oil has boomed in Eagle Ford, the Bakken area of North Dakota and the Niobrara formation in Colorado, helped by directional drilling and hydraulic fracturing technology that breaks oil trapped in rock. Drilling servicers and pipeline companies are also benefiting as producers of unconventional oil grow rapidly and need equipment and transportation for their crude, she said.

The C$38.4 million Dynamic Strategic Energy Class Fund, managed directly by Stevenson, is the third-best performer among comparable funds in Canada this year, having risen 14 percent through yesterday, according to data compiled by Bloomberg. The fund was little changed at C$9.96 at 4:42 p.m. in Toronto, up 78 percent from its March 2009 low, and is in the 91 percentile of its peers.

Vision, Profitability

Stevenson’s focus on shale oil stocks is based on the “low risk” growth the sector offers as companies squeeze more production out of properties by drilling several wells, she said. Companies focused on oil generate higher profits which translate to more cash flow to reinvest or pay out dividends, she said.

When choosing companies, Stevenson first looks at a company’s management team and its “vision” as well as assets and profitability, she said.

Stevenson began her career working in the petroleum industry at Petro-Canada and Amoco Canada Petroleum Co. after graduating from the University of Calgary with a Bachelor’s degree in commerce.

Captivating Personalities

“I was hooked” on the oil and gas industry, she said. “I like the science angle as the technology is always advancing. The entrepreneurial personalities are captivating. I like that it is a cash business. You pull it out of the ground and sell it.”

Stevenson, who grew up Calgary, Canada’s energy capital, completed a Master of Business Administration at the University of Alberta and began working in corporate finance, including stints at FirstEnergy Capital Corp. and Dundee Capital Markets.

Stevenson is in a minority as a woman working in the Canadian energy industry. Women account for only 11 percent of senior officers in the Canadian mining, oil and gas industry, according to the website of Catalyst, a group which promotes participation of women in business. Women made up 17 percent of vice presidents in the Canadian financial markets industry in 2008, according to Women in Capital Markets, a non-profit group that promotes the development of female leaders in business.

Be Smart

“The boys in the patch don’t seem to mind if you are red green or purple, male or female,” Stevenson said. “Just as long as you are smart and good at your job. Added benefit: they remember you easily as there aren’t many gals.”

PHX, a Calgary-based drilling-service provider, which Stevenson recently bought, has risen 21 percent this year, while Houston, Texas-based producer Noble Energy is up 31 percent. That compares with an 7 percent decline for Calgary-based oil-sands producer Cenovus Energy Inc. and Athabasca Oil Sands Corp. which has shrunk by 31 percent.

“The activity by these companies spreads also to the service, midstream and pipeline sectors,” said Stevenson. Energy stocks comprised 64 percent of the fund at Aug. 31 and infrastructure stocks 20 percent, according to its website.

Pipeline companies like Enbridge Inc. of Calgary are among those benefiting from shale oil production in the U.S. and Canada, she said. The Dynamic Strategic Energy Class Fund also owns TransCanada Corp., Inter Pipeline Ltd. and Pembina Pipeline Corp, all based in Calgary.

Supply Surplus

Enbridge is building a network of conduits to transport oil from the Bakken, such as the Sandpiper project, a 610-mile (981-kilometer) pipeline that will connect North Dakota supplies with the refineries of eastern Canada and the U.S. The company has C$36 billion of planned expansion projects over the next four years, Chief Executive Officer Al Monaco said on Oct. 1.

“We own tons of pipeline stocks,” said Stevenson “They’re very defensive stocks, but offer a long run of growth. The fundamental theme still works for them because there’s a big supply surplus they have to service.”

Enbridge is little changed this year, Inter Pipeline has gained 6.2 percent. TransCanada is down 4.8 percent as the company waits for a decision by the U.S. State Department on whether it can proceed with construction of the Keystone XL pipeline.

Trilogy, a Calgary-based producer with land in the Duvernay, is another recent acquisition even with the 3.7 percent drop this year, Stevenson said.

Duvernay Exposure

“I like the Duvernay and I like what Exxon says about it,” she said. Producers operating in the formation will likely double the number of wells drilled to about 200 next year, according to a July 4 report by Peters & Co., a Calgary-based investment firm.

Exxon Mobil Corp. made its largest Canadian acquisition last year when it bought Celtic Exploration Ltd. for its leases in the Duvernay and Montney formations.

“The interesting thing with the Duvernay is that there are really only two public companies you can own if you want meaningful exposure and so Trilogy benefits because it’s the best of what’s available,” said Greg Dean, who helps manage a C$7.9 billion portfolio for CI Investment’s Cambridge Global Asset Management., which also owns shares in Trilogy.

Stevenson is selling natural gas shares, which are still suffering from depressed prices, she said. Natural gas prices have fallen by half over the last five years. Gas for November delivery settled at a three-week high of $3.723 per million British thermal units at on the New York Mercantile Exchange today.

Political Risk

She also recently sold Calfrac Well Services Ltd., whose shares have risen 26 percent this year, contributing to a four-fold gain since 2009. “It had a wicked run,” she said.

“It’s really hard to make money on gas,” Stevenson said. “There’s a lot of hype about LNG. It’s fun but dangerous.”

Political risks in the Middle East, including the civil war in Syria and rising interest rates are the two biggest threats to Stevenson’s investment thesis, she said.

“If prices of oil get high enough then it will hurt demand,” Stevenson said.