Fund View: Sprott says buy oil stocks, dump natgas and uranium

Stock Market Predictions

BANGALORE (Global Markets) - Buy oil stocks on high crude prices but sell uranium and natural gas, was the advise of a fund manager at Sprott Asset Management's energy fund, which invests in small and mid-sized Canadian companies.

Oil prices are trending higher on fundamentals and not on geopolitical upheavals alone, reckons Eric Nuttall, the lead portfolio manager of Canada's Sprott Energy Funds -- a $169 million natural resources-focused equity fund.

"Emerging economy demand (for oil) growth is outpacing the demand destruction that we are seeing in developed economies, namely United States," Nuttall told Global Markets in an interview.

His top 10 picks include Legacy Oil and Gas (LEG.TO), Westfire Energy Ltd (WFE.TO) and Bankers Petroleum Ltd (BNK.TO). By the end of 2010, his fund topped the wider Toronto Stock Exchange's S&P/TSX composite index .GSPTSE by more than 17 percent.

The fund is overseen by Toronto-based Sprott Asset Management, which is headed by Bay Street contrarian investor and Canadian investment guru Eric Sprott.

"In Canada we have more listed oil and gas companies than any other country in the world, so we have a tremendous amount of opportunity," said Nuttall, who joined the fund in 2003.

The average price of oil is likely to be in the range of $95-$100 a barrel this year, he said, adding that demand would strengthen in the second half as global economy gradually brightens.

Oil is currently trading at around $94 a barrel, while natural gas prices have slumped to trade just over $4 per million British thermal units (mmBtu) from its 2008 levels of $13 per mmBtu, and may fall further.

The fund manager said stubbornly low natural gas prices had not bottomed yet and the over supply condition would not cool any time soon.

"Looking until 2015, we are in a sub $5-ish world until North America becomes an exporter of natural gas ... the record price five years down the line should have been $7 per mmcf for a company to earn a decent rate of return," said Nuttall.

FUKUSHIMA WOES

Several countries were forced to cap or delay their nuclear energy aspirations after the meltdown at the Fukushima Daiichi plant in northeastern Japan, prompting strident anti-nuclear protests around the world.

"For uranium, I think the outlook is awful. We have many countries effectively deciding to shut down all of their nuclear reactors," said Nuttall, who is underweight on uranium stocks.

Countries like Germany and Italy are set to completely ban or lessen their dependence on nuclear energy, while developing countries are delaying their expansion plans under immense public pressure.

World's No. 2 uranium producer Cameco Corp's (CCO.TO) shares have lost over a third in value since Japan was hit by an earthquake and tsunami, while Uranium One Inc's (UUU.TO) market value has more than halved since then.

Although Nuttall questioned the feasibility of finding an alternative to nuclear energy for some of the countries, he asserted uranium would remain weak this year.

(Reporting by Aftab Ahmed in Bangalore; Editing by Saumyadeb Chakrabarty)