Hedge fund that won big shorting U.S. shale is bullish on Canada

By Melissa Karsh and Catherine Ngai on 1/10/2020

NEW YORK (Bloomberg) --After big wins shorting U.S. shale companies last year, one energy hedge fund is turning its sights on the beaten-down Canadian oil sector.

After gaining 40% last year, according to a person familiar with the results, Westbeck Capital Management is betting Canadian firms are better positioned because they don’t need to spend as much as their U.S. counterparts, giving them a higher level of free cash flow. Also, oil fields in Canada aren’t experiencing the rapid rate of production declines that has plagued companies operating in American shale fields.

Canada’s energy industry has seen a wave of financial blows in recent years, driven by a lack of pipeline availability that has choked off growth prospects. That’s prompted foreign companies to ditch more than $30 billion of assets in the past three years.

But a turnaround may be coming.

“At current oil prices, Canadian oil names are generating gigantic amounts of free cash flows as they aren’t spending money to grow their product, they are just spending to maintain it,” said Jean-Louis Le Mee, chief executive officer at London-based Westbeck. “It’s just a little bit odd to have energy valuations at all-time lows when S&P valuations are at all-time highs. It’s truly unprecedented.”

Le Mee, who previously co-founded BlueGold Capital Management, said he favors Canadian mid-cap names like MEG Energy, Baytex Energy, Crescent Point Energy, Parex Resources and Torc Oil & Gas.

Already there are signs that Canadian players have regained their footing. The S&P/TSX Composite Energy Index, which comprises Canadian energy companies, quietly outperformed its U.S. equivalent in 2019. Earlier this week, TD Securities maintained an overweight stance on the Canadian energy sector while downgrading U.S. exploration and production companies.

Le Mee launched Westbeck in 2016 with Will Smith, the former head of natural resources at Michael Hintze’s CQS and Tudor, Pickering, Holt & Co.’s Jon Mellberg. After back-to-back losing years, the energy fund beat the market as well as many of its peers by wagering against a basket of 12 U.S. shale companies.

Hedge funds on average lagged the 29% gain of the S&P 500 Index.

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