Bullish oil fund managers start to capitulate on oil prices

Last fall, when the price of oil started dropping, fund manager Craig Hodges figured crude would rebound in 2015 and began buying shares of companies he thought would be unfairly hit, including construction company Primoris Services Corp. and Eagle Materials Inc, which produces sand used in fracked wells.

Hodges, who runs the $2.1 billion Hodges Small Cap fund, is now starting to concede that oil prices will stay low for as long as a year or more because of a global glut.

Even the air strikes Thursday in Yemen by Saudi Arabia and its Gulf Arab allies, which prompted a one-day 5 percent boost to the price of oil, presented “a traders move” and doesn’t signal a sustained move up, Hodges said. Oil fell 6 percent to about $48 a barrel on Sunday.

Instead of looking for a bounce back this year, Hodges is now on the hunt for companies that can take advantage of low prices and are strong enough to withstand a year or more of waiting for oil to be more profitable for producers. It could be two or three years before oil goes back above $70 a barrel, he said.

While his fund is top-loaded with companies like American Airlines Group Inc and affordable footwear retailer Shoe Carnival Inc that are benefiting from cheap gas prices, he is also buying stakes in companies such as Matador Resources Co – an energy company that has been using the slow market to negotiate lower-priced contracts with its suppliers to lower costs. Matador shares are down 16 percent over the last six months, but are up 5.8 percent for the year through Thursday.

Primoris Services is down 24 percent this year, while Eagle Materials is up about 8 percent. Hodges’ fund as a whole is up 2.7 percent this year, better than 62 percent of its peers. The benchmark Standard & Poor’s 500 Index is little changed since the beginning of the year.

“Oil could stay down longer than anyone is anticipating,” Hodges said.

Increasingly, mutual fund managers don’t see the oil glut going away any time soon. Lord Abbett’s Thomas O’Halloran, for example, last year was calling fracking stocks one of the pillars of his $3.6 billion Developing Growth fund, among the top-performing small cap funds over the last decade. He is now shifting more money into solar companies.

“We think that there’s another leg down” to oil prices, O’Halloran said. His fund is up 4.1 percent this year, better than 60 percent of its peers.

At London-based Guinness Atkinson fund managers have been adding more natural gasexposure to their portfolios, out of the theory that a slump in oil production following price declines will over time boost natural gas commodity prices. The firm is keeping some oil exposure in light of political factors such as the Yemen airstrike, but it doesn’t expect a recovery based on fundamentals until at least the end of the year.

“It may take even longer than that,” said Will Riley, one of the portfolio managers of the Guinness Atkinson Global Energy fund. The fund is down 2.1 percent this year, better than 48 percent of its peers.