Baron Energy and Resources Fund (BENFX)
Fund Manager since
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Baron Energy and Resources Fund invests in securities of energy and resources companies and related companies of all sizes.
Review and Outlook
Since we are primarily an energy fund, our performance is influenced by a number of macro factors, such as the prices of commodities, interest rates, economic growth rates and regional and geo-politics. All of these factors were at play both during the quarter and over the full year.
During the fourth quarter, domestic oil prices fell about 7%, with prices slumping during refinery turnaround season, when refineries are shut down for revamping. However, prices began to strengthen as refineries returned to service. International oil prices were not as volatile, and the average price was essentially flat. Signs emerged that global demand was strengthening with the economy; and Libya, Syria and several other countries experienced shortages.
Natural gas prices were also flat in the fourth quarter, although they ended the full year up 30%. We think production growth will likely keep pace with demand growth such that 2014 prices will remain fairly close to 2013 average levels, although winter weather is always a wildcard.
The U.S. rig market was better than expected in the fourth quarter despite the typical holiday slowdown and colder and stormier weather than anticipated. Outside the U.S., rig activity has continued to grow at subdued rates, although optimism is building in certain regions. In December, the Mexican government passed reforms that will allow foreign oil companies to operate in the country. We believe these reforms should positively impact this market later in 2014 and beyond.
Midstream business conditions remained robust, as supplies of oil and gas in developing regions continue to grow and exceed the current infrastructure. The refining and marketing sector had a very strong fourth quarter as well, as wider oil price differentials drove wider margins for U.S. refining companies.
Overall, we see little reason to change our fundamental outlook for the energy sector. We think that oil prices will remain within the $80-110 range for the next year or so. While production is growing rapidly, the long-term costs of finding and developing oil have not really improved and have arguably worsened in recent years. Demand growth has also re-accelerated. We also think that we have passed the bottom in U.S. gas prices.
Valuations across the sector were generally flat in the quarter and remain attractive relative to the long-term earnings and cash flow growth potential. More companies are either generating free cash flow and returning it to investors at a faster rate or are getting closer to generating free cash flow. With multiples generally below historical mean levels, this should be a positive setup for investors. We see the best opportunities in exploration and production stocks with above average growth in production and cash flow, undervalued oilfield equipment and service stocks, and high growth midstream Master Limited Partnerships.
These companies all tap into our major macro themes of 1) unconventional resource development, 2) rising service intensity for maintaining and growing production, 3) investment and development of the midstream processing and transportation infrastructure in the U.S. and around the world, and 4) significant future growth in activity and investment in the offshore oil & gas sector, particularly in deepwater where exploration success has been significant and development projects are stacking up.
Top Contributors/Detractors to Performance
Quarterly Attribution Analysis
The Quarterly Attribution Analysis for period ending December 31, 2013 is not yet available
Yearly Attribution Analysis
The Yearly Attribution Analysis for period ending December 31, 2013 is not yet available
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The prospective performance of the companies discussed herein is based on our internal analysis and reflect our opinions only. We cannot promise future returns and our opinions are a reflection of our best judgement at the time of publication. Our views are not intended as recommendations or investment advise to any person and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. Investing in the stock market is always risky. Current and future portfolio holdings in the Fund are subject to risk.
Source: FactSet PA.