BlackRock Inc.’s Daniel Rice, who beat 99.9 percent of U.S. stock-fund managers over the past decade, said an expanding global economy will probably push oil prices above $100 this year.
The gain may lift shares of oil and gas companies by 25 to 30 percent and help double the price of coal stocks, the manager of the $1.5 billion BlackRock Energy & Resources Fund forecast in an interview in his Boston office. His biggest concern, Rice said, is what happens if oil rises even higher.
“I will be bullish on the stocks for part of the next surge, but I won’t be if oil gets to $120,” said Rice, whose fund returned 18 percent a year over the past decade
Crude topped $92 a barrel Jan. 3, the highest in 27 months, helped by an economic rebound, stock market gains and a decline in inventories. Rice, the longest-serving manager of a U.S. energy mutual fund, according to Chicago-based Morningstar Inc., said oil may rise high enough by 2012 to trigger a global economic slowdown, much as it did in 2008 when oil reached $145 a barrel.
“If the world keeps growing at this rate, it strains the whole system,” said Rice, who believes an oil price between $85 and $90 a barrel is the most the world can tolerate for an extended period. “There just are not enough commodities to satisfy the demand.”
A dollar invested in Rice’s fund 10 years ago would be worth more than $5 today, according to data compiled by Bloomberg. Only three out of more than 4,000 U.S. mutual funds did better in the 10 years ended Dec. 31, according to Morningstar.
Rice’s fund fell 53 percent in 2008 when the global recession cut the price of oil by more than 60 percent in the last six months of the year. The fund gained 25 percent in 2010.
Rice, 59, has been running the fund since 1990. BlackRock acquired Rice’s former employer, Boston-based State Street Research and Management Co., in 2005 and renamed the fund.
Forecasters disagree about the path prices will follow. While Goldman Sachs’ analysts expect oil to average $100 in 2011 and $110 in 2012, Fadel Gheit, an analyst for Oppenheimer & Co. Inc., said a price between $60 and $70 a barrel would make more sense based on supply and demand.
“Prices are high, not because of scarcity, but because of speculation,” said Gheit in a telephone interview. “People don’t want to be bothered by the facts.”
Forecasters surveyed by Bloomberg don’t expect oil to average more than $100 a barrel until 2013. Oil will average $87 this year, based on the median of 34 analysts estimates. That would be the highest since the record $99.75 reached in 2008 and 40 percent more than 2009’s average of $62.09.
In October, the International Monetary Fund predicted the global economy will grow 4.8 percent in 2010 and 4.2 percent in 2011. Under that scenario, oil could spike well above $100, Rice said.
Crude prices higher than $90 will hurt the global economy, Christophe de Margerie, chief executive officer of Paris-based energy producer Total SA, said in December.
Rice manages about $6 billion in a mix of mutual funds, institutional accounts and hedge funds. He holds a bachelor’s degree from Bates College in Lewiston, Maine, and a master’s of business administration from New York University.
His investing style has been the same since he started managing the fund. He and his team gather information daily in an attempt to forecast energy prices. If they get the commodity prices right, said Rice, the stock prices will follow suit. He selects individual securities by estimating future cash flows and comparing them to current stock prices.
Some of the biggest changes in allocation occurred at the start of the past decade, when Rice increased natural gas investments to 85 percent in early 2000, from 25 percent in 1999. He pared natural gas investments to 25 percent in 2002, after the price of gas had doubled from 1999 levels, and raised coal investments to the same percentage that year.
Since 2002, changes in the portfolio have been less dramatic, Rice said, as oil prices tripled and coal prices more than doubled.
Rice’s largest holding, coal producer Massey Energy Co., said in November that its board ordered a strategic review, a process that may lead to a sale. Massey, based in Richmond, Virginia, owns the Upper Big Branch mine in West Virginia where 29 people died in April. A number of coal firms have been mentioned as potential acquirers, including Abingdon, Virginia- based Alpha Natural Resource Inc., said Michael Dudas, an analyst with Jefferies & Co.
“The market has nominated Alpha as the lead candidate,” said Dudas in a telephone interview. He has a $60 price target on Massey, which trades at $56.39.
Rice, who also owns Alpha, said a combination would make sense because the two companies could cut costs from overlapping operations. Massey is particularly attractive, he said, because it has “a huge inventory of undeveloped properties.” Massey shares gained 29 percent last year; Alpha rose 38 percent.
Coal stocks make up about one quarter of Rice’s fund, and represent five of his top 10 holdings as of Sept. 30, Morningstar data show. Coal for delivery by barge on the Big Sandy River, a benchmark for Central Appalachian supplies, has climbed to more than $72 a ton from about $54 a ton at the end of 2009, according to data compiled by Bloomberg.
Rice, who has owned the major coal producers for the past nine years, said the price could go to $90 over the next year as U.S. exports to Asia climb. Coal at that level would mean profits high enough to double coal company shares, “as crazy as that sounds,” he said.
If scientists find a way to cut carbon emissions from burning coal, a breakthrough Rice thinks is more likely to come from China than the U.S., coal’s potential could be enormous, he said.
“It would be like the holy grail,” said Rice. “It could mean billions and billions of profits.”
The price of natural gas sank about 20 percent in 2010 under the weight of abundant supplies. Rice said that while the glut could last through 2011, supplies will begin to shrink in 2012 as exploration firms cut back on drilling. He sees gas prices climbing from the current $4.47 per million British thermal units to about $6.50 over the next two years.
“There’s a glut of gas,” Scott Black, president of Boston-based Delphi Management and a longtime investor in gas stocks, said in a telephone interview. “Right now it is hard to find cheap gas stocks.”
Rice said major oil companies will continue to buy up gas producers because it is the cheapest way to build reserves and the best properties are controlled by small and mid-sized firms.
In November, San Ramon, California-based Chevron Corp., the second-largest U.S. oil company, agreed to buy Atlas Energy Inc. of Moon Township, Pennsylvania, for $3.2 billion, giving it access to the natural gas-rich Marcellus Shale formation in Pennsylvania. Exxon Mobil Corp., the biggest U.S. oil company, which is based in Irving, Texas, agreed to buy Fort Worth, Texas-based XTO Energy Inc., a gas company, for $35 billion including debt in December 2009.
Another gas company, Oklahoma City-based Chesapeake Energy Corp., rose the most in seven months Dec. 20 after billionaire investor Carl Icahn boosted his stake and said he was talking to management about increasing its value. Rice held Chesapeake as of Sept. 30, according to data compiled by Bloomberg.
Rice identified three companies -- Fort Worth, Texas-based Range Resources Corp., Houston, Texas-based Petrohawk Energy Corp. and Pittsburgh, Pennsylvania-based EQT Corp. -- as potential takeover candidates in his portfolio.
Rice said he expects to benefit from ongoing industry consolidation, even though he doesn’t pick stocks because they may be takeover targets. While Rice has changed little about his approach to energy, the business has changed in one fundamental way, he said.
In the early part of the last decade, said Rice, energy supplies were so great that the world could grow rapidly without pushing prices much higher. Ten years later that is no longer true, he said, especially when it comes to oil, whose scarcity may act as a brake on the global economy.
“We don’t have the luxury of growing unfettered anymore,” he said. “If the world grows too fast, it then has to grow more slowly.”
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