Midwest Buyside

In late June and early July, across America’s Heartland, energy-stock buysiders were watching natural gas prices tick up from less than $2 a million Btu this spring and crude oil prices improve into the $80s from a flirtation with $70.

A couple of additional commodities—the 2012 corn and soybean crops—were also of great interest locally, as scant rainfall and extreme heat stressed the plants. 2012 corn futures that began trading three years ago at $4 a bushel were $7-plus at press time. Soybeans that opened at $9 in 2009 had pushed past $16.

“It’s pretty dry and pretty hot,” says Mark Keller from his office in St. Louis, where he is chief executive officer and chief investment officer of Confluence Investment Management LLC. “We’re in our second week of temperatures over 100. It’s a bad time of year for it. There’s a line running through the middle of Illinois: Above it, it’s not too bad; below it, it’s bad. We’ll see.

“It is good for natural gas, though.”

Confluence runs funds with an investment turnover of about 20% a year—thus, a relatively long-term strategy of holding stocks some three to five years. “Although,” says Keller, “that can be hard to do in commodity-based stocks, particularly when we’re in the world we’re in right now, with prices as volatile as I can remember.”

His memory is long. Keller began his investment career in 1978 with A.G. Edwards & Sons Inc., culminating with chairing the firm’s investment-strategy committee before co-founding Confluence with several colleagues after A.G. Edwards’ sale to Wachovia Corp.

In mid-2011, the Confluence portfolio changed course, when the team held several coal stocks and saw the profitability of these names turning downward. “We would have liked to have held them a lot longer but the macro-environment changed so quickly. We found ourselves getting out in the fourth quarter of last year.”

It also quickly exited most of its gas-weighted stocks earlier this year. “When gas prices started falling, they went down faster than we thought they would, and we had to protect ourselves.”

Meanwhile, the team may get into a commodity just as quickly. “Prices can get ridiculously cheap sometimes and it makes sense to get back in. We like to be long-term investors, but the more commodity-sensitive your company is, the faster you need to be willing to make a short-term decision.”

Across its portfolios, Confluence generally maintains a market weighting of between 6% and 10% to energy exposure. Within its Global Hard Asset portfolio, which invests only in commodity-producing names, it was about 26% weighted to energy in early July. More than half of that was in oil producers; the balance, in some remaining gas names, one coal name and some uranium.

Keller believes the team may be adding to its gas holdings in the coming months. “(Gas) is awfully cheap right now. We doubt we will see the heyday prices like $8 to $10 anytime soon, but $4 to $5 is not unrealistic. It’s a question of how fast you get there. That’s one of the reasons we didn’t zero out (our holding in) the space, when it was falling apart: We didn’t know where the bottom was.”

Without improvement on the demand side for natural gas, he doesn’t see a way out of excessive supply. “Right now, all we can rely on is the weather. We’re getting a hot summer, but it would be even better if we have a really cold winter.”

Otherwise, meaningful gas draws will have to come from new gas-fired power generation. And, he adds, “not just peaking units. We’d like to see more gas used as a base-load fuel. Of course, utilities are reluctant to do that because they have long memories of supplies getting very tight in the past.”

Natural gas demand for transportation would be helpful, too. “This, like power generation, is all tied up in regulation, however. We’re very positive in the long run for natural gas, but whether we keep 4% in natural gas in our Global Hard Asset portfolio or move it up to 12% or 14% would have to depend on some weather-related calls or positive developments on the regulatory side.”

From a macro-view, several long-term trends have affected the firm’s outlook for energy—demand from emerging economies, U.S. voters beginning to question the benefits of globalization and the cost of the U.S.’ role as super- power, and a growing distrust of central banks in managing currencies. As a result, “we’ve seen investors come into commodities in the past six years that we haven’t seen in a long time.

“That leads us to like upstream companies with reserves in the ground and that have proven they are capable of discovering reserves.”

Keller says company management is key when selecting stocks. “People may be created equal but, when they go to work, they don’t produce the same results. Some people just produce better than others. Some people are better at finding resources than others.”

A strong balance sheet is also essential, coupled with a track record of maintaining financial strength. The firm also looks at a company’s history of attention to shareholder returns. “Most energy companies don’t pay a big dividend, which is one way we get a return. The primary component of return is share-price appreciation. But if they are issuing shares all the time to fund exploration, the pie is getting sliced into more pieces and ours gets smaller. Ultimately, we aren’t going to be happy.

“We like management teams that care about shareholders. You tend to find this when they own a lot of shares themselves.”

The firm’s short list of preferred energy names includes Murphy Oil Corp., which it has owned for several years. Keller says the company has strong inside ownership and is open to spinning off assets that may have greater value outside the organization. “We think they’re smart.”

Also, small-cap Contango Oil & Gas Co., which with Plains Exploration & Production Co. is a remaining gas-weighted holding, has done a good job for shareholders. “You can be big or small, but you have to remember the shareholders, to think more in terms of shareholder returns instead of management returns.”

Confluence has owned refining names in the past but Keller thinks valuations in the space have peaked lately. “We think margins are about as good as they can get. My view is that, when margins are awful, people think they’re never going to get better, so it’s usually a good time to invest, and when margins are great, it’s usually time to step aside.”

He emphasizes again the importance of the people who manage the assets when picking stocks: “The better management teams can take advantage of the opportunities a bad market presents.”

A common error in energy investing is trying to guess the short-term movements of commodity prices, he says. “I’ve been investing in energy for 33 years now. It’s a lot harder than anybody thinks it is.

“It’s why we focus more on people, assets and (political) jurisdictions. You can’t get away from the commodity issue, but let’s try to get all the other things right.”

Grain barges are docked next to the Gateway terminal in Cahokia, Missouri, in view of the St. Louis skyline. The terminal has moved more than 20 million barrels of shale oil since it opened four years ago and can offload a 120-car, oil-loaded unit train in less than 24 hours.

MLP-focused

A few blocks from Confluence’s offices in St. Louis, Jim Cunnane and Quinn Kiley with Famco MLP, a division of Advisory Research Inc., are finding an abundance of investment opportunities in midstream-weighted stocks. Cunnane, managing director and chief investment officer, and Kiley, who is a managing director and senior portfolio manager, manage the open-end mutual fund Famco MLP & Energy Income Fund and three closed-end mutual funds.

Working together for seven years, they lead an 11-person team with Cunnane bringing a portfolio-management and research background while Kiley brings experience in energy investment banking with Banc of America Securities, along with degrees in geology and law.

They have $2.8 billion invested in energy midstream names, with $2.6 billion of that in MLPs (master limited partnerships) and the balance in C-corp parents of energy infrastructure.

Kiley says of the space, “We view that as essential to the economy. If MLPs don’t do their jobs operating that infrastructure, then no one else can do theirs. It is essential to the upstream and it is the lifeblood of the downstream side, so it has historically very stable, visible cash flows from our research.”

While investments in MLPs over the years had been made for their tax-advantaged quarterly distributions, the space has transformed into a yield-plus-growth play as new oil and gas resources onshore the U.S. have created demand for new means of getting them to market, Kiley says.

“There is need for new infrastructure as well as for rerouted and repurposed infrastructure. It’s a good growth story as well as a good yield story.”

The strategy of also owning C-corp names that hold infrastructure is a way to get ahead of the MLPs, anticipating what may become a new name as it is rolled out of a C-corp or participating in the premium paid for assets that may be bought by an MLP.

“Hopefully we can get one step ahead of the market and take advantage of those opportunities by having a flexible mandate,” Cunnane says.

For example, the team has held investments in Kinder Morgan Inc. and in its MLP as well as in El Paso Corp., whose midstream assets were bought by Kinder Morgan earlier this year. “By being willing to invest across any piece of the equation, we accomplish a more holistic view of energy infrastructure, whether it be in an MLP or not.”

When it does get involved with E&Ps, it is usually as a way to add value to its midstream investment. “And, typically, it is in an entity that’s connected to a midstream asset that we understand very well. Do we invest in E&P? Yes, but really as an add-on to our midstream specialty.”

The abundance of new oil, gas-liquids and dry-gas supply onshore the U.S. has given Kiley and Cunnane much to invest in of late. Kiley says, “Six years ago, the question was ‘How do you service the Barnett?’ Then, ‘How do we service the Fayetteville and the Haynes - ville and bring that to the U.S. Northeast?’

“Now, you see completely underserviced regions—the Bakken, for example—that need a lot of new infrastructure and the investment question is ‘Does someone already have an asset there that will be able to access that supply first?’

“You’re seeing old pipelines being repurposed and flows turned around. There is talk of the major gas pipelines from the Gulf to the Northeast being reversed or completed as bidirectional pipelines.”

The demand picture has changed as well. “It used to be that gas left Texas; now more of it is being consumed there. It used to be that getting more gas to the Northeast was Job One. Now, you have the Marcellus in the Northeast, so that changes things. And, then you have huge population growth in the Southeast, so you have to redirect assets and commodities to there.

“All of those things present great opportunities for the MLPs and other energy-infrastructure companies. Their work has to happen very early to realize value at the front end (for the E&Ps) and at the back end (for the refiners and end users) of the energy value chain.”

a display in the garden’s international “Lantern Festival” exhibition this summer of 26 lighted works.

Cunnane notes there are risks. “One particu- larly relevant to MLPs is the expansion in the types of assets that are getting into the MLP. By our estimates, the MLP has historically offered high, stable yields. Given this, we’re seeing more and more risky assets fly into the MLP structure. So that is something we concern ourselves with.”

Also, there is legislative risk relating to MLPs in particular. “They are a creation of the tax code. As legislation is bandied about, we could see things very beneficial to MLPs, such as adding renewables as a type of asset eligible to MLPs.

“Or, on the flip side, you could see a flattening of the tax code that could include getting rid of the MLP tax advantage.”

They concur that current U.S. infrastructure dynamics have been a surprise to the upside. Kiley notes that refiner Valero Energy Corp. has reported that it might quit using light, sweet oil imports next year. “That is something no one would have imagined five years ago, let alone 20. There is talk that, in the next five years, the Permian Basin will hit peak production not seen since 1973. These are all things the energy flow in the U.S. is bringing to the fore and that could change the economy as a whole.”

Staying away from ‘stories’

The weather outside Justin Tugman’s office in Chicago was similarly “toasty.” Tugman, a co-portfolio manager, has some 10% exposure to energy—mostly in E&Ps and also in some oil-service and MLP names—in the Perkins Small Cap Value Strategy Fund for Perkins Investment Management LLC.

“On the E&P side, we think there are some very attractive, long-term opportunities,” says Tugman, a former Simmons & Co. International Inc. energy analyst. That includes gas-weighted names, when keeping a long-term focus in mind, he adds. “But with the pullback in oil prices we’ve seen in the past two months, we are starting to find some attractive opportunities in the oily names.”

Recently, too, Tugman is finding entry points in midstream stocks. “There was a six- to nine-month period where valuations were relatively full in that space. But, with the pullback, we are starting to find some opportunities. Longer term, we really like the outlook for this group. We’re going to need more energy infrastructure in this country and I think the MLPs are particularly well suited to capitalize on that.”

The renewed U.S. energy-infrastructure space is far from being overbuilt, he says. “Look at the way our production is changing. Historically, we got a lot from the Gulf of Mexico, Texas and Oklahoma. Now, we’re finding prolific resources in North Dakota. We’re expanding in basins in the Rockies and, then, you have the Marcellus. All of those areas are starved for infrastructure.”

The midstream outlook in the Marcellus is particularly appealing, he adds. Production costs are extremely economic and, “for the most part, you’re kind of starting from scratch in infrastructure build-out, so we think it has a long time to run.”

Downstream, Tugman says fundamentals look good, but the Perkins funds have little exposure to the group. “It’s due in part to our concern about the outlook on the demand side for refined products as well as with regard to the (strong) performance of the stocks so far this year.”

Yet, U.S. refiners are adding capacity. What gives? “You have to be very particular in where you are looking for exposure to refining. Over the past year, the most advantaged refiners have been in the Midcontinent, which have been able to benefit from the WTI-Brent differentials and sometimes get the blowouts in differentials for feedstock from the Bakken or Canada.”

But East Coast refiners, which are almost entirely dependent on imported Brent-priced crude, are shuddering—some even shuttering. “They have had a very hard time making money and even staying in business. If you look at the closures and the ones that have been announced, it’s close to a million barrels along the Atlantic and you don’t see anything shut on the Gulf Coast or in the Midcontinent.

“So, you have to be very selective in where you’re looking for your downstream exposure. I think you will see some more expansions, but the big issue is that most of the expanded capacity, particularly on the distillate side, is going to be for export. We are cautious in terms of worldwide economic growth and, therefore, that brings us to our assumptions in terms of the demand for distillate around the world.”

A colleague of Tugman’s analyzes the petrochemicals industry, and the findings are applicable to his energy research. “A lot of people are calling it the ‘manufacturing renaissance’ in the U.S. We’ve seen several new ethylene crackers announced. And, look at the results of the petrochemical companies: They have been making a lot of money on the backs of lower gas prices and now, lower NGL (natural gas liquids) prices.”

As for the latter, Tugman is more cautious in his outlook for gas-liquids-exposed E&Ps. “Everyone has raced to go after liquids and, while there is going to be demand growth (for NGLs) down the road, that’s the problem: It’s down the road. The really big growth in demand is probably at least several years away, so we could be in for a period of pain on the NGL side of the E&P perspective.”

Within dry gas, the Perkins team has been finding contrarian investment opportunity in the past nine months. “We think markets, in general, are like pendulums: Eventually they swing too far in either direction. The oil-to-gas ratio we witnessed earlier this year was greater than 50 times versus the historical standard of about six times. We feel a return to the mean is inevitable.”

U.S. liquefied natural gas (LNG) export may help gas prices, but Tugman sees it offering very little help and not anytime soon. “I don’t think it will allow us to get back to $6 or $8 on a sustained basis.” Probably just one or two export facilities will be built, he forecasts. Cheniere Energy Inc.’s plans at Sabine Pass on the Gulf Coast are the furthest along and one on the East Coast may be permitted, he says. “But you’re starting to see a lot of (government) pushback and, frankly, when Congress gets involved, all bets are off.”

Canadian LNG exports may be more helpful. “That would mean fewer imports of natural gas into the U.S. and may help to firm up gas pricing here.”

Outside of commodity prices, the Perkins team looks for names with strong balance sheets and capital prudence. “They don’t get into liquidity situations. If it takes a lot longer than we may have expected (for commodity prices to rebound), we want to own companies that are survivors, that are able to take advantage of that downcycle and pick up assets on the cheap. That just builds a stronger company going forward.”

The team also stays away from “stories.” For example, unconventional plays have made headlines during the past decade, and Perkins has invested in horizontal-play producers. “But far too often in the past decade, investors have gotten into the latest ‘story’ and, oftentimes, with poor investment results. There are several names that were trading at a high in 2008 because they announced they had acreage in some shale play. Now, the chance of anyone who invested at that time making their money back—or even getting their money back—is probably pretty remote.

“You have to be very careful in investing in ‘stories.’ That’s why we try to focus on numbers.”

He isn’t optimistic about returns from the Haynesville shale play, for example. “These are prolific wells, but look at the cost structure versus what may be the long-term gas-price outlook. You have to question the economics. There was a lot of money spent on acreage. It’s going to be a challenge for some of the players there.”

Meanwhile, in the conventional, vertical-play Gulf of Mexico, the Perkins team has shied away from small-cap—and even mid-cap—names. “Can a small company withstand any kind of scrutiny or cost from a spill like Macondo? It is really difficult for us to quantify, so if we can’t quantify what the downside risk to the stock is, we don’t invest in it.”

Bob Perkins founded the firm in 1980 after 12 years of managing mutual funds at Kemper Financial and, in the past decade, sold a majority stake to Janus Capital Group. “We tell our clients that what you can expect from us is to participate in up markets but lose less in down markets. In terms of energy, we’ve been overweight in this group since 1998.” Bob Perkins made that winning call, Tugman notes.

“That goes back to our key tenet of markets reversing to the mean. When crude was $10 (in late 1998), we knew it was unsustainable down there. We didn’t know how high it would go, but we knew it was unsustainable down there. I don’t expect our overweight in energy to change in the future.”

International gas

In Kansas City, besides the weather, the Scout Investments Inc. team was hot about baseball, as the 83rd annual All-Star Game was around the corner and it was Kansas City’s turn to host. “It only comes around every 30 years,” Gary Merrill notes.

Merrill, a senior investment analyst, leads Scout’s research on international energy equities. With the firm since 1991, he previously worked as an auditor in the insurance and pipeline industries. Sean Ketcherside, investment analyst, provides energy and utilities-sector research on U.S. equity strategies. Combined international and U.S. energy-stock exposure was running under- to equal weight, generally less than 10.5%, this summer.

On the international side, Scout is underweight integrated oils, E&P and oilfield services. In storage and transportation, it is overweight, primarily as one of Scout International Fund’s top holdings, is Enbridge Inc. “That was actually our best performer last year,” Merrill says. “It’s just able to grow very steadily with hardly any commodity-price risk, so it gives us a way to participate in the growth in the energy industry without taking commodity price risk.”

Within the U.S., “There are areas in refining I like because of the crack spreads we’ve seen,” says Ketcherside. “Some of the (feedstock) bottleneck issues domestically have created some strong margins for certain downstream players,” he says. “They’re benefitting from lower natural gas prices as well, so that is helping their margins too.”

He also likes C-corp midstream names; due to the funds’ structures, Scout cannot invest in MLPs.

He is bearish on E&P and thinks the oilfieldservice space is weak, as pressure-pumping capacity has grown and overall pricing for services has softened, despite a pickup in demand for drilling iron in liquids plays taking up the dry-gas slack.

Within E&P, however, one name Scout has owned for some time is Pioneer Natural Resources Co. “It has great assets in the Permian and the Eagle Ford,” Ketcherside says. “And, one of the aspects of their Permian acreage I’m really encouraged about is their horizontal drilling in the Wolfcamp. They are talking of upwards of 1 billion barrels of oil in place in Wolfcamp A and B.”

He also likes Gulfport Energy Corp. for its Permian exposure and for its Utica shale-play acreage in Ohio, where the wells “look encouraging . It will be exciting to see new development come out of that region.”

Internationally, Merrill likes Australian LNG producer Woodside Petroleum Ltd. as it capitalizes on Japan’s demand for more natural gas in lieu of nuclear-based power generation. “We think LNG demand is going to grow about 5% a year through 2020. They just started up their new Pluto project, which should give them a lot of free cash flow going forward.”

Of Canadian players, Merrill likes Canadian Natural Resources Ltd., which has exposure to the oil sands. “We’re looking for about 9% production growth there at a fairly low cost. We think production cost is $30 to $36 a barrel from Phase 1 of their Horizon project. They should go from 600,000 barrels a day in 2011 to 850,000 in 2015, and they also have a lot of hidden assets that aren’t on the balance sheet yet but will be in future years, as they get them developed.”

Ketcherside also favors Gulfport Energy for its exposure to Canadian oil sands through its Grizzly project. “That oil can go, obviously, down here into the U.S. or there is discussion of different ways to get it to the western Canadian coast to China in the future. So, having exposure to that resource is a good play.”

Merrill says of oil-sands assets, “It’s a stable, predictable growth rate. They don’t have to spend a lot of money on exploration. They have all the resources they need for the next 20-plus years right there at their fingertips. It’s just a matter of spending what they need to get it developed.”

As for U.S. natural gas, Ketcherside sees a contrarian investment opportunity these days for long-term investors. “With the way the rig count for natural gas has dropped and with the increase in use in power and chemical plants, I think we’re starting to see a bottom forming in the price for gas. If you can hold the names for a few years, I think you can get some great values,” he says.

But, like Tugman in Chicago, he isn’t counting on U.S. LNG exports to help domestic prices. “It’s a ways away—2015 or 2016—before any sort of liquefaction plants are in operation in the U.S. and I don’t think there will be many of them. I’m not sure the federal government has an appetite for allowing much export.

“We’re more worried about this year and next year; 2015 is a bit beyond our horizon. It’s like shale gas in China: It’s going to take a long time to develop. Yes, it’s out there, but it’s something we can’t invest in right now.” From an international perspective, Merrill says, “we like natural gas anywhere other than in the U.S. or Canadian market. Shale-gas development everywhere else has been way delayed. ExxonMobil tried to drill for shale gas in Poland and Hungary and has failed in both places. China is a ways out. It will be many years to get the infrastructure built and a lot of these countries don’t have the gathering systems, the trading systems.”

Ketcherside thinks a common error in energy investing “is being too scared to sell when things are too good and to scared to buy when things are too bad. In highly cyclical sectors like this, when oil prices are really high, people want to buy everything and, often, that’s the best time to sell your holdings, as opposed to doubling up. When things are really bad, sometimes that’s the best time to buy.

“But it is scary to buy like that.”

Merrill notes, “We’re not afraid to pay up a little bit if we feel the business model is worth it. We’re not going to chase value stocks that are beaten down and looking for a turnaround.”

Down with NGLs

Nearby, in Overland Park, Kansas, David Ginther had an eye on forecasts for the U.S. corn crop in the midst of his energy research. “When I look at corn, it ties into ethanol and that ties into oil and gas, so it’s all interrelated to me.”

Ginther, a senior vice president of Ivy Investment Management Co., runs Ivy Dividend Opportunities Fund and Ivy Energy Fund, which have combined exposure to energy stocks of some $375 million. Previously a business analyst for Amoco Corp., he has been with Ivy Funds and affiliate firm Waddell & Reed since 1995.

Among new investments, Ginther is focused right now on oilfield services. “I have always liked them, and I think they are very undervalued right now. The last times you saw some of these valuations were during the 1998 Asian crisis and the 2008 financial crisis.”

One of Ginther’s favorites for some time has been Schlumberger Ltd. “They are a bit more diversified within their products and have more international exposure, apart from the U.S. cycle. The stock ties more to international spending and oil prices because most of their customers are driven by oil markets.”

He also likes National Oilwell Varco Inc. “These are the guys who supply the drilling equipment to the land rigs and to the deepwater rigs. I think there is a major deepwater cycle going on and they are going to be the main beneficiary of the number of rigs we need to build there—and onshore as well.”

Piquing his interest anew, however, are oil-weighted onshore North American E&Ps. “Those types of companies have a lot of potential going forward. But, recently, I also like the E&P companies that are a bit more diversified away from the U.S., such as Anadarko (Petroleum Corp.), Apache (Corp.) and Noble (Energy Inc.). They’re very important players here in the U.S., but Apache has assets in Egypt, Anadarko has had some great success offshore Africa, and you have Noble with discoveries offshore Israel.”

Anadarko has put any Macondo-related liability behind it, he notes. Another issue, the Tronox Inc.-related litigation involving Kerr-McGee Corp., which it acquired in 2006, is nearing a court determination. “I like the valuation right now. I think the legal issues have been holding their valuation down and I think most of those issues are past them or are being addressed.”

As for Apache, its exposure to Egypt is of some concern, but he believes “it’s more of a headline risk than an actual operational risk.”

Ginther also likes Continental Resources Inc. and its U.S. oil exposure. “It’s more of a true Bakken-play, onshore company that has been very successful and runs its business very well.”

He isn’t comfortable with the other kind of liquids producer, however—that is, the gas-liquids-weighted kind. “Oil has a bigger market. With these gas liquids, what the industry will tend to do, if you look at history, is overproduce those NGLs, bringing down prices. We’ve done that in natural gas a number of times and I think we’ll probably do that with NGLs too. I think NGLs will trade at a bigger discount to oil in the future. So, I prefer the more oily names.”

He also likes midstream names. “Midstream is a great place to be over the long term—the next five or 10 years—as you see production grow across the U.S. We haven’t had oil production grow in this country since Prudhoe Bay in the 1970s.”

Some of the excitement around midstream opportunities is due to the fact that U.S. infrastructure build-out will be under way for years, he expects. His cue to exit the space will be when demand for new pipe wanes. “Right now, producers are at full capacity within months and waiting for the next pipeline. That’s one way to know it isn’t over yet.”

Another cue will be when less oil is being shipped by rail. He sees these oil-car “unit trains” move through Kansas City from the Bakken, for example, on their way to Gulf Coast refiners. “If you start to see rail volumes fall, that means we have enough capacity in the pipelines to move product.”

As for investing in dry-gas-weighted stocks, Ginther agrees with Scout’s Ketcherside that it’s too soon, unless maintaining a long investment horizon. “We haven’t seen yet how unconventional gas works through a cycle. They surprised us all with how much these wells produce and how quickly supply grew. If we don’t drill for a year, what effect is that going to have on supply? Production growth was greater than I ever expected. So, what’s going to happen on the downside? We haven’t seen that yet. How are they going to really react?”

In terms of fundamentals, however, he thinks “in the U.S., we’re probably at the bottom.” Most of the gas-directed rigs have moved on to drilling for liquids. Coal switching to gas in power generation is eating into excess supply. An unusually warm winter this year has made excess supply look enormous, but a return to more normal weather would move gas prices higher.

“Now, when I say ‘higher,’ it might not be back to $6 or $7 but maybe closer to $4 or $5 gas in the next 12 to 18 months. I think that would probably be a surprise to the market. The market isn’t expecting that.”

David Ginther, who runs Ivy Dividend Opportunities Fund and Ivy Energy Fund from his office in Overland Park, Kansas, sees rail cars of oil traveling through town on their way to the Gulf Coast. “If you start to see rail volumes fall, that means we have enough capacity in the pipelines….” Above, tourists gather at the Gateway Arch in St. Louis.

When meeting with lay members of the energy-investor and financial-advisor communities, Ginther makes an effort to explain the industry. “Everyone thinks oil is easy to find and gasoline is easy to make. You just put it in your tank. People don’t realize how hard it is to deliver that product. You drill down 10,000 feet in 5,000 feet of water, pump the oil out, put it in a tanker. When there’s not a hurricane, you offload it into a pipeline to a refinery, and put that gasoline (product) into another pipeline to a city like Kansas City.

“It’s cheaper than bottled water—and water fell out of the sky the night before. It’s a very efficient industry. You try to move 90 million barrels around the world…

“I don’t think people really appreciate how hard people in the energy industry work and how successful they are.”