US fracking for a UK stock picker?
We are often asked how much value we really get from meeting with companies face to face that you can’t achieve by reading a conference call transcript or annual report. I have had an even more sceptical response to my trip to New York, Chicago and Houston. What possible value could a UK investor garner from meeting with businesses in America?
In fact, the benefits are substantial and derived from two areas. First, meeting with the heads of US subsidiaries of UK companies (as I did with BHP Billiton, Pearson, Centrica and Michael Page) can shed a great deal of light on what makes companies tick on an operational level, below the CEO/ Investor Relations level.
However, perhaps more important is the picture than can be constructed from speaking to US competitors, suppliers and customers of UK businesses which we already know or hold shares in. This information gathering is akin to what the great investor Philip Fisher called “scuttlebutt” and can be very educational. On this front, it was meetings with energy companies in Houston which proved most fascinating.
Like many investors, we have had a quite basic (even simplistic) understanding of how shale oil and gas fit into the global energy picture. We knew that shale oil production sat near the margin of the cost curve and, as a result, has been in the cross-hairs of OPEC and Saudi Arabia in choosing to prioritise their market share and production at the cost of a lower oil price. This basic narrative has had pretty negative implications for companies such as the UK’s Weir Group, which has a strong position in the market for pressure-pumping equipment (kit used in the hydraulic fracturing process necessary to unlock shale oil and gas). Weir has seen a collapse in orders as shale activity has slowed. If Saudi Arabia is prepared to “price shale out of the market” then surely a business like Weir’s is structurally challenged?