John has worked as a Wall Street and Bay Street equity analyst, a hedge fund manager and a partner in a management consulting firm. He is currently a senior vice-president and portfolio manager with First Asset Funds Inc. and founder of Report on Money.com and is also the editor of Money Focus (www.reportonmoney.com) a free weekly publication on the economy and the stock market, which shows you where the best opportunities lie for your investment dollar. Prior to starting Report on Money and The McConnell Group, John was the Senior Vice President in charge of utilities research at Kim & Company LLC, a Wall Street investment research company. He was a founding partner of De Novo Capital, Inc., an international asset management company. He was the partner in charge of the energy marketing and trading practice at Navigant Consulting Inc. and a finance professional with a leading energy company.
John received his Bachelor of Science in Mechanical Engineering from the University of Waterloo and his Master of Business Administration from INSEAD. In addition, he holds the designation of Chartered Financial Analyst and Financial Risk Manager and is a member of the Global Association of Risk Professionals.
Me: Mr. Stephenson, can you please explain as briefly as you can your views of the recent market slide we have seen?
Mr. Stephenson: The market slide is related to a growing concern in the US and globally about the risks in the credit markets, particularly as they relate to the subprime market. Many defaults, including several hedge funds managed by Bear Stearns have occurred. As a result, panic selling has ensued which has resulted in the selling of assets of all types.
Me: Can you please give me your summarized views of the natural gas sector and natural gas stocks?
Mr. Stephenson: The natural gas market is a market that is driven by weather. Most of this weather related demand occurs during the winter and the northeastern United States is the driver of this demand. Gas is stored in underground caverns during the summer and withdrawn in the winter. The buyer of this storage capacity is local natural gas distribution companies who are obligated under the law to provide natural gas for industrial, commercial and residential purposes. Injections into storage are irrelevant, however, when a mild winter occurs, the amount withdrawn is small. Currently gas prices are depressed at a time when the cost of bringing on incremental gas supply is somewhere north of $8.00/mcf. This is a money loosing proposition. I am bearish on natural gas weighted producers and very bearish on the service sector. If you see the commodity move and remain sharply higher (i.e. north of $10.00/mcf) this is a screaming buy, otherwise, it is a sector to be avoided. This is a regional product and is not impacted whatsoever by world events or supply/demand relationships in other parts of the world.
Me: If possible can you please highlight your views on the crude oil and crude oil stocks? I've heard analysts offer opinions about crude oil inventories being at the highest they've been in a while and others say that $77/barrel is due to the growing demand and limited refining capabilities; do you have any opinions regarding the above statement?
Mr. Stephenson: Commodities such as energy are cyclical. Everyone knows that. The issue is and has always been, is it different this time around and are we at the cyclical peak. My answers are yes and no. So pervasive is this thinking that even executives in this industry are bearish on the commodity. Unfortunately they are wrong. The refining issue is tangential and refers to the fact that not are we short refining, but we are VERY SHORT the type of refining that we need - namely, refiners that can process heavy grades of crude. In the 1990s, big oil made bets on securing access to several prolific supply basins - their choices were to go to: Russia, Venezuela, Nigeria and the Caspian. Unfortunately, they have all been fraught with political risk. Consequently, they are all trying to buy stakes in our oil sands, which while expensive to produce offer political stability and long-lived resources. The reason they are here is no other. In the 117 year history there has only been six years where year over year demand was less than the previous year. Demand from China and India continues to surge. China is the number two producer of automobiles in the world and doesn't yet export a single car. It is unlikely, in my view, that the Chinese will go back to driving bicycles anytime soon.
Me: Lastly, if you could only hold one stock for the next 6 months which one would it be and why (2 reasons for owning it will do fine)?
Mr. Stephenson: Nexen (NXY: TO, NXY: NYSE) because it is oil weighted and its production is growing by 50% over the next year, therefore it has the best risk/reward balance.
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