Running with the Energy Bulls


". . .all signs point to a rebound in energy stocks"

The signs are there: Crude prices are almost $80 a barrel. Emerging market economies are rebounding. China has resumed its fast-paced growth.

Those signs point to one conclusion, according to portfolio manager Fayez Sarofim & Co.: You should buy energy stocks.

Fayez, which manages $18 billion for pension plans, foundations, other groups and individuals, recently released a decidedly bullish long-term energy outlook.

Jeff Jacobe, Fayez' director of investments, expects slowing production at existing oil fields to add to crude prices' rise. Meanwhile he predicts the challenges facing alternative energy sources like wind and solar should keep traditional sources in demand for decades. To understand what this means for investors, Fortune spoke with Jacobe. Edited excerpts are below.

You say the average portfolio doesn't include enough exposure to global energy companies. Yet, you detail the challenges of aging oil fields. How do you marry those points? Jacobe: We take a very long-term oriented, low-turnover approach to investing, and we typically try to find the industry leaders in particular sectors. Over long periods of time, those stocks and those companies have delivered the highest returns on capital and generated the most free-cash that is returned to shareholders via dividends and buybacks.

What those companies bring to the table are capital, technology and project management skills. . .

Is energy output going to keep up with future demand from China, India and emerging markets?

There's obviously a very high correlation between global GDP growth and energy demand. In terms of oil, we feel that GDP growth in the developing world will be the real driver of oil demand; and, going forward, GDP growth will be higher outside the U.S. than inside.

Global oil demand growth should be about 1% a year, which is below what it's been the previous 20 years. But even with 1% demand growth, you have to also consider that the decline rate on the base. . .is declining anywhere from 5%7% a year. You have to replace that with additional investment.

The way the market is going to balance over the next 1015 years is through price.

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