Article mentions oil at $70 in 2005 and Canadian companies mentioned.
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The TSC Streetside Chat: Gerald R. Jordan, Jr., of Hellman Jordan Management
By TSC Staff
Originally posted at 8:00 AM ET 10/14/00 on RealMoney.com
Gerald R. Jordan, Jr. is the real deal, a proven money-maker since beginning his investment career in the late 1960s at Putnam Management in Boston. Since 1978, Jordan has overseen the portfolios and private partnerships for the clients of his firm, Hellman Jordan Management Co. Hellman Jordan manages between $2 billion and $3 billion for endowments, pension funds, wealthy individuals and the partners of the firm. In the 1990s, the firm's largest equity partnership compounded at 31.6% annually, compared with the S&P 500's 18.2%.
Fitter than most of those 10 years younger, the 61-year-old Jordan has a gas trading from his office overlooking Boston Harbor. And why not? He's so darned good at the game it must be fun to play.
His most aggressive hedge fund is up over 60% in the year to date.TSC chief markets writer Brett D. Fromson visited with Jordan on Oct. 4 and they spoke at length about how Jordan has been making money this year and in years past. He has been long health care and oil stocks and short tech stocks. But in the past few days, he has covered all his tech shorts and gone long. How long will he stay a bull? Not long. It's just a three-to-five-day trade.
He doesn't discount the possibility that some tech highfliers could hit new highs, but then he expects tech in general to resume its slide. Jordan is a good storyteller and doesn't pull any punches. Have fun.
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TSC: Gerry, what themes have worked for you so far this year?
Gerald R. Jordan: Energy. Energy's been working to a fare-thee-well. We have done very well in energy, and the only other theme that has been working to that extent is shorting different sectors of technology. They've been money-makers in shorts. Not as much as we probably should have made, given what's happened, but it was better being short than being long tech.
I basically believe that as the decade of the '70s was a big energy decade, the decade of the '90s was a decade of technology. I think the decade of the '00s is going to be a decade of energy again. And that the entire world, most especially and notably the U.S., has got an enormous amount of work to do to rebuild the infrastructure for energy. Most people are seeing disparate reports and activities on oil and gas, but if they follow a lot about it, they'd recognize that we've got a real problem. We don't have enough crude oil because we don't have enough refining. We don't have enough tanker capacity. We don't have enough pipeline capacity. We don't have enough natural gas, and we don't have any leadership in Washington. So where are we going with energy? I think energy has just begun. I suspect by the year 2005 we will have seen, or will be seeing, the price of oil above $70 a barrel.
TSC: Adjusted for inflation?
Gerald R. Jordan: This is in the futures market, the spot market for light sweet crude will be $70-plus a barrel. Whether it's on that date or not -- I suspect we will have seen it before then -- whether it's much higher or much lower than that remains to be seen. But this is an event I suspect we're going to have to face. The only thing I think will preempt that might be a very serious depression worldwide. But growth worldwide, especially outside the U.S., is totally moving in a linear fashion related to the consumption of energy: crude oil, gasoline, diesel fuel, natural gas, everything else. And as long as the economy grows, the demand for energy will be greater.
When I talk to oil analysts, they say, "Wait a minute, the price of oil always goes back into the teens. Oil is a depletable resource." My response is that today the world will consume 75 million barrels and tomorrow whatever oil exists in the world will be 75 million barrels less. And that will happen every day going into the future, on average, but increasing to the extent that by the year 2010 that 75 million barrels a day will probably be 85 million to 87 million barrels a day, unless we have a deep economic slump where people stop using as much energy and the demand for energy doesn't grow as rapidly. I question whether the reserves or potential reserves exist throughout the world that will allow us to fuel the economies of the world going forward, over the next five to 10 years.
TSC: At current price levels?
Gerald R. Jordan: At any price level. Eventually -- and your readers must realize -- the world, theoretically, will run out of oil. There will be no more oil.
TSC: What do you say to the analyst who says that at higher prices more supply will come on, and that would then naturally bring prices back to some lower equilibrium level?
Gerald R. Jordan: I would say to them, "Where will this supply come from?" And they say, "Well, there's oil, there's plenty of oil in the world." And I say, "Well, where is it?" And then they come back to saying, "Well, OPEC." My view is maybe it's in OPEC. OPEC has convinced the world that it's certainly there.
TSC: Are they 35% right now of the world's total production?
Gerald R. Jordan: Of production? Yes. And it's going up, and if there's a lot of oil in the world, it's certainly in OPEC. I'm not refuting, but I question whether OPEC has the capacity over the next five years to increase production substantially.
TSC: Why?
Gerald R. Jordan: Well, we know that of the 11 OPEC nations, nine of them have reached capacity. And I guess they can drill, they can do more infill development to drilling to increase production. I hear rumors that the production in Venezuela is actually declining when they, in fact, are stating that it's increasing. Who knows? Most of the information we get out of OPEC is really weird.
TSC: In what sense?
Gerald R. Jordan: In the sense that it's terribly unreliable. The oil minister says one thing about what's happening, and then the dictator, the despot or the president or whomever is running the country says something different. And then the two of them change positions two months later. Now, I have no idea how much oil there is out there. I do know that there's not as much oil as the American people seem to think. I do know that when Al Gore talks about the oil companies creating this conspiracy of higher prices along with OPEC, it's rubbish. I mean, it's ridiculous.
Because the oil companies themselves are afraid that there's too much oil out there, but they're not going out looking for it, because it's too expensive. And they're still afraid of lower prices. So it's a very interesting conundrum, and until we have a really cohesive energy policy, which won't be forthcoming certainly until next summer, we're going to be subject to, I think, ever-increasing prices.
TSC: If Gore is elected, he's clearly intent on focusing on the demand side of the equation, not the supply side.
Gerald R. Jordan: Right. Exactly.
TSC: How effective do you think that would be?
Gerald R. Jordan: Well, when I read the popular press, they claim that oil is no longer a very important part of our economy, like it was back in the '70s.
TSC: Right. I think the factoid I saw was from 13% to 7% GDP or something?
Gerald R. Jordan: I think back in the '70s it was as high as 25%, and right now it might be 7%...
TSC: Right.
Gerald R. Jordan: I accept that. But what that means is that the price of oil can go considerably higher before it starts to have an impact on the economy. That's empirical.
TSC: Just mathematically.
Gerald R. Jordan: That's right.
TSC: Maybe there'll be less screaming about it simply because it's a smaller percentage?
Gerald R. Jordan: Exactly. So if I come at it from the back side, maybe we're talking $100 a barrel for oil before the economy starts to hurt. Now this is all predicated on, not my prediction, but my assumption or fear that maybe all that oil does not exist out there. Because if you put a real oil man's nose, ear to the ground and say tell me where this oil is, he won't know.
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"I suspect by the year 2005 we will have seen, or will be seeing, the price of oil above $70 a barrel."
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TSC: I assume you've asked a few people.
Gerald R. Jordan: I've asked everybody. A noted bear on the price of oil on Wall Street is coming in today, and I will say to him, "There's plenty of oil in the world." And he'll say, "Of course there is." Well, where is it? The only place we know it is is in OPEC. We know there's oil in the Caspian Sea, but that's not going to be here for five years.
TSC: There's some in Alaska, but we don't want to drill.
Gerald R. Jordan: But that's five years away. Everything is five years away. There's plenty of oil in Russia, that's five years away. I'm concerned about the next three years.
TSC: When did you first begin to get long oil stocks, and how did you originally come to this view?
Gerald R. Jordan: (Laughs) This is the Peter Lynch method of initial analysis. A year ago May, I was driving down to my summer house. Since I wasn't sure whether the water system was working, I stopped to fill up my gas tank and also to buy a couple of gallon jugs of water, and I was sort of struck by the fact that the water cost more than the gasoline. I know that the water came out of a pipe in New Hampshire, and I know that the oil came out of a pipe 5,000 feet in the ground in Saudi Arabia. And I said, "There's something wrong with that. I know that water is a renewable resource, and that oil isn't." I thought I'd look into this, and that's what's happened.
Now, if we talked about oil ultimately getting back to its place as a valued resource, $70 a barrel would only put it back to where it was in 1979 based on a 2.5% inflation rate. But back in 1979, we had done a lot of drilling. We had done a lot of exploring. We had found a lot more oil. OPEC had increased their productive capability. North Sea oil and gas was coming on. Alaska had already come on. Offshore western Africa. More development drilling in Indonesia and the Gulf of Mexico. We were doing a lot more things. But we're not in that position now. I mean, in 1981 -- was it 1981? -- there were 5,300 drilling rigs operating in the world. I've seen a figure over 5,000 internationally, and today I think it's 1,800.
TSC: What if you're wrong?
Gerald R. Jordan: All of my investments and trades are typically based on an implied risk/reward relationship that I compute based on my own analysis of the opportunities and the risks in each situation. And when I talk about oil going to $70 a barrel or higher, I think that's going to happen. Now, if it doesn't happen, that doesn't mean I'm out there on a limb, waiting for $70 a barrel. If I thought that, I'd retire and put all my money with 5% margin into oil futures. Who knows? I think the fundamentals suggest that that could happen.
TSC: How do you express this view in the market, then?
Gerald R. Jordan: So I express this view by owning all of those companies that will benefit from the price staying above $25 or $27 a barrel. Which I think the world is ready to accept, and certainly OPEC.
TSC: Therefore, it's a sustainable level?
Gerald R. Jordan: It's a sustainable level, and it's a level at which the oil companies can profitably go out and, we think, explore for more oil. We think. But we won't know until they do that. So our largest position is in the oil service industry, going the gamut from Schlumberger (SLB:NYSE - news) to Grey Wolf (GW:Amex - news).
TSC: I don't know Grey Wolf.
Gerald R. Jordan: Grey Wolf is a small land driller that sells at $5 a share.
TSC: How many names are we talking about, roughly?
Gerald R. Jordan: In the oil services side of the portfolio, there's probably seven or eight. Then we go to natural gas. We're running out of natural gas, too. So we have a lot of positions. First off, some of the oil service stocks that we own, predominantly gas plays, are either in the Gulf of Mexico or Canada or Continental United States.
TSC: You don't, by any chance, own Alberta Energy (AOG:NYSE - news), do you?
Gerald R. Jordan: Yes. We own them all. And we own three Canadian gas companies, Alberta Gas being one of them, because that's where the biggest plays are going to come. The reason we don't have a huge exposure there is because we don't know much about it. We don't know much about the people. We're a small firm. Most of our research is kind of back-of-the-envelope. Then we position ourselves in front of the wind.
We know what's going to happen, we think, to gas. So long as we're going to consume more gas than we can produce, the price isn't going to go down, and people that are drilling for it are going to command higher rates and build more rigs, and people that are drilling and producing it are obviously going to have much higher cash flow because the prices are so much higher.
Now, if the stocks are not going to perform, and we know that a lot of the major oil stocks have not performed, then what's ultimately going to happen is they're going to take that cash that they generate and buy back their stock. It's going to come down to one of the most simplistic financial decisions a company can make. The cheapest oil they will then be able to find will be in their own backyard, when they buy back their own stocks.
TSC: That's a fairly simple calculation.
Gerald R. Jordan: Right, and if the oil business goes the way I think it will, these stocks will eventually sell at 20 times earnings, and they'll find it makes more sense for themselves and their shareholders to go out and drill for more gas and more oil.
TSC: Now we haven't really talked about the majors here. I assume you have positions in majors?
Gerald R. Jordan: We do. Not big positions, but we own some of the major, domestic integrated companies. That's our smallest sector.
TSC: Because?
Gerald R. Jordan: Because they're not growth companies. They're not growing production, most of them, but they're dirt cheap, and on a cash-flow basis, it's like finding black gold. In addition, we own the refiners.
TSC: Who are the refiners in this day and age?
Gerald R. Jordan: Valero (VLO:NYSE - news), Ultramar Diamond Shamrock (UDS:NYSE - news) and Sunoco (SUN:NYSE - news).
TSC: Any others?
Gerald R. Jordan: Well, there's a lot of small ones. But typically, when people go down in quality in an industry, it's because they're buying more interesting, riskier, lower-multiple stocks. What do we think Valero is going to earn this year? Close to $6, and the stock has just made close to its all-time high of $34. (Laughs)
Now, one of the reasons we're having a problem getting heating oil in the Northeast is that we don't have enough refining capacity. As a matter of fact, the most recent API data figures showed that we produced a huge amount more of gasoline than heating oil in the latest week, when in fact you and I know that we need to be producing more heating oil. Why did we produce more gasoline? Because it was more profitable for the refiners to produce gasoline. They're in the process, a lot of them, of converting. They can't convert all, but they can convert to where they produce more heating oil, but unless the price is appropriate, they'll produce what's most profitable.
TSC: Obviously you would be long on heating oil futures here.
Gerald R. Jordan: Yes, I have been.
TSC: Let me change the subject for a moment. You raised the question of a possible recession as one thing that could undercut the probability of this outcome. What is the economic tone as far as it seems to you both domestically and globally?
Gerald R. Jordan: Well, it's no secret that everything is slowing globally. I think we're kind of at a crossroads here. We've had a wonderful decade of returns in the stock market. Just about one out of every two Americans is involved somehow in the stock market. They're either speculating in it or they own it in their 401(k), their pension plan, or they work in the industry. Kids coming out of college, all anybody wants to do is get in the investment business and make a million in five years.
TSC: Right.
Gerald R. Jordan: It's an extraordinary phenomenon that's going on. Now, the most extraordinary of all phenomena was what happened last year with the Internet, telecom, technology craze. I mean, that was an event that started or reached its blowout stage, but the blowout stage started last October and ramped on into early March of this year. And it was the most extraordinary, speculative binge the stock market or the financial markets have ever seen.
Well, I'm sort of a historian of the stock market, and this was the most extraordinary binge. I don't have any data that would tell me exactly what was going on from perhaps March to September in 1929, but I know that the country hadn't taken up daytrading. I mean, the Internet spawned the ability of the entire world to jump into the stock market with ease, and it created stock for people to own. They were eating their young, and now they're digesting. This is the latter part of the digestive process.
TSC: In response to my question about the tone of the economy, you have no doubt that globally we're seeing slowing?
Gerald R. Jordan: Globally we're seeing some slowing. And it's a combination of a number of things. It's a combination of stock market slowing. It's a combination of oil. It's a combination of you just can't get something this big to grow continuously at 6%, regardless of how well you feed it. And finally, getting into the predictive phase, we used to have something called the presidential cycle, that the incoming president would clear the decks early in the term. And we know we're going to have a new president early in the next term, and I would suspect that he would encourage the Federal Reserve Board chairman to keep the brakes on and do everything he could, including cutting back on spending in the hope that the markets go into decline so that in the fall of the year 2002, that the markets bottom and we go into a huge bull market for the next two years to allow him to be re-elected. That's the way it always worked, and it seems to me that this is a pretty good opportunity to see that historical event unfold again.
TSC: Without regard to your political preference, would you say Bush or Gore is the odds-on favorite here?
Gerald R. Jordan: I honestly don't know. I think it's pretty close.
TSC: Would it make a difference to you who was elected?
Gerald R. Jordan: That's a very difficult question to answer. On the one hand, I think it's fairly obvious that Mr. Bush is more inclined, or prone, and equipped, to address some of the more immediate needs from an energy standpoint than Vice President Gore. And from a stock market standpoint, the companies that we're invested in probably would do better. I would expect to see much greater tax incentives because he, I think, would address mostly the supply side with less consideration for the demand side. However, I have a suspicion that Vice President Gore might do a lot of the wrong things as far as the future of this country is concerned, as far as energy self-sufficiency is concerned, and maybe that would, in a selfish way, enable me to have a much bigger, longer play.
TSC: At the same time you have had this view, obviously you trade in and out of the market, intraday as well as intraweek, or what-have-you.
Gerald R. Jordan: Well, it obviously depends on what our intermediate-term view of the market is. We're very much oriented by the market.
TSC: Intermediate is how long?
Gerald R. Jordan: Six weeks. And what I mean by that is that it's very important for us not to lose money. We rarely take long-term positions unless we have huge convictions. Back at the beginning of the '90s, we did take long-term positions. We took long-term positions in technology.
TSC: For example?
Gerald R. Jordan: Intel (INTC:Nasdaq - news) and Microsoft (MSFT:Nasdaq - news).
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"The Internet spawned the ability of the entire world to jump into the stock market with ease, and it created stock for people to own. They were eating their young, and now they're digesting."
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TSC: At what kind of multiples?
Gerald R. Jordan: With hindsight it doesn't matter. In the range of 10 to 25 times earnings. The two biggest years we had in that decade were 1991 and 1995. Where we really do best is coming |
