London-based oil-focused hedge fund Westbeck Capital suffered a small dip in July after failing to capitalise on strong oil equities returns – but the strategy still remains up almost 70 per cent so far this year, with the firm now strongly bullish on an imminent price surge.
Westbeck has taken a cautious tone on the commodity short-term, but is becoming increasingly buoyant on a price rise next year, with oil predicted to follow on the heels of gold as a major beneficiary of strong investor inflows.
“We plan to remain aggressively exposed to oil equities on the long side for the foreseeable future and will continue to trade front oil tactically long and short,” Westbeck co-founders Will Smith, CEO, and CIO Jean-Louis Le Mee, said in an investor update this week.
The firm’s Westbeck Energy Opportunity Fund – co-run by Smith, a former partner and head of natural resources at Sir Michael Hintze’s multi-strategy hedge fund CQS, and Le Mee, ex-founding partner of BlueGold Capital – has advanced an eye-catching 69.3 per cent year-to-date, having slipped just 0.9 per cent last month.
“We were a little early in moving most of our long side risk to a select number of highly cash generative oil equities,” Westbeck said of the loss, which was the strategy’s first monthly slide since February.
They explained: “The decision to move our long risk away from oil and into oil equities backfired in the last week of July but has yielded strong results in the first half of August.
“We again traded oil tactically successfully in July – the oil book generated 2 per cent P&L – but suffered in our equities which frustratingly pulled back further in spite of very strong Q2 results and outlook guidance, as well as higher oil prices.”
Smith and Le Mee said the odds of a coronavirus vaccine being approved in the US and Europe in Q4 have “skyrocketed”, which could prove a catalyst for oil prices rebounding to 2019 levels.
“Inflows into commodities are reaching levels not seen since 2011,” they said, noting the increased dollar weakness and return of inflation. “Precious metals so far have been the main beneficiaries but we believe oil is next as the market moves into a large deficit.”
Looking ahead, Westbeck said the “seeds of USD100+ oil have now well and truly been planted”, adding: “We are increasingly believers in a new oil ‘super-cycle’.”
The team is also confident of a strong oil equities comeback before the year is out.
“Many exciting names are still down 50-60 per cent YTD. A 30-40 per cent rebound in the coming weeks is certainly achievable even without much help from oil prices,” the note said.
“All the companies in our portfolio are earmarked to generate significant FCF yield in 2020, which is remarkable in a year of record low oil prices but is a small glimpse of what these companies are capable of achieving in a higher oil price environment.”