Investors can often benefit from change because others are slow to understand it. Two or three years ago, many industry insiders still thought expensive offshore drilling was necessary to meet global energy demand. But we recognized that offshore production was facing headwinds from a fresh supply of oil from lower cost sources such as hydraulic fracturing of shale, commonly known as fracking.
We began shorting the equities of offshore and ultra-deep water drilling-rig companies who lease their rigs to oil producers. Soon after we took this action, oil prices started to fall, and OPEC decided not to cut production to bolster prices. With that turn of events, we decided to extend our positioning further by also shorting the stocks of vessel companies and engineering firms who service the deep-sea drilling business.
As 2015 came to an end, with oil prices hovering around $30 per barrel, the stocks of many of the companies we shorted had declined significantly, thereby delivering the returns we had hoped to achieve from our short positions. At that point, with the possibility that oil prices might not decline much further, the risk/reward dynamics had changed and we adjusted our overall position accordingly. While not altogether abandoning our short positions because we thought the deepwater drilling industry would still be under pressure, we decided to balance our overall exposure to the energy sector. We additionally took long positions in high quality oil exploration companies that would stand to benefit if oil prices began to rise and the fundamentals for that industry started to improve. The advantage of a flexible investment strategy is that you can realize gains in a variety of scenarios.
For a deeper dive into how we positioned our portfolio to capitalize on changing fundamentals in the oil industry, read our paper Shifting Tides for Offshore Drillers.
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These views represent the opinions of the Portfolio Manager at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.