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Betting on energy trends pays off for Normand Lamarche

Normand Lamarche sees the day when beleaguered natural gas stocks will re-emerge as investing gems.

"I do see a world - maybe five or 10 years from now - where natural gas is going to play a significant role in the power industry," said the portfolio manager and co-chief investment officer of Toronto-based Front Street Capital. "It may be in the transportation industry, fuelling cars and trucks. It also happens to be greener than oil-related products and coal."

Natural gas prices should remain depressed for two or three more years, but there are ways - be it through energy-service or technology companies - to play the growing demand for the commodity, said Mr. Lamarche who has been piloting the Front Street's Special Opportunities Canadian fund since 1999.

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The $590-million fund, which can undertake limited short selling, has benefited from his other calls - such a big bet on gold stocks in 2009. It has won two Lipper Awards in the natural resources category for two periods ending Oct. 31, 2010. It posted an annualized 15 per cent return over three years, and 18.3 per cent over five years.

Mr. Lamarche said the glut of natural gas on the market, caused by new drilling technology that allows easier extraction at lower costs, has depressed prices in the range of $4 (U.S.) per thousand cubic feet, sharply lower than $15 in 2005.

"At some point, we are going to want to own the resource in a big way," he said. "That's a timing thing that we are trying to figure out … We have been short natural gas stocks for a while."

Meantime, he is investing in the sector peripherally through energy-service companies such as Trican Well Service Ltd. and Gasfrac Energy Services Inc. He also owns such companies as Westport Innovations Inc., which is working on converting internal combustion engines from gasoline to natural gas.

"Who competes with natural gas?" he asked. "Those are things we look at. We would be cautious long term on coal producers."

Mr. Lamarche's longer-term outlook for natural gas is part of the many themes that drive the Front Street Special Opportunities Canadian fund. This fund is focused on resources because of the growing demand for commodities by China, India and other emerging markets, he said. Energy security, self-sufficiency and environmental concerns are also central themes in the portfolio.

What will drive my companies is not the oil price, but their growth in production, cash flow, earnings, reserves and net asset value.

The fund is about 50 per cent invested in oil and energy-service companies. Mr. Lamarche doesn't rely on a rising commodity price to make money, but is instead invested in companies applying new technology to re-drill old oil fields.

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"What will drive my companies is not the oil price, but their growth in production, cash flow, earnings, reserves and net asset value," he said. "I am happy if oil is in the $70- to $90-range because my companies can be quite profitable."

Among non-oil investments, Mr. Lamarche is playing a rise in uranium prices, triggered by increased demand from China for its nuclear power program and by deep interest in sources of cleaner fuel amid environmental concerns. Instead of plowing money into uranium stocks, he prefers to invest in units of Uranium Participation Corp., a closed-end fund that buys uranium.

"Uranium is one of the few commodities that can deliver significant sources of green power," he said. "Wind and solar are nice, but they don't work without much government incentives. The last time I checked, governments were broke around the world, so there is a risk today and in the future that governments are going to stop providing those incentives."

Base Metals

Mr. Lamarche also owns base metal companies, which are economically sensitive to a recovery in global growth. "Copper is a commodity we like, and nickel," he said. "The world economy is growing at a 4-per-cent-plus clip … It is a world that is not too hot and not too cold. The growth is a story of two worlds - half of it is probably growing too rapidly [China]and the other half [United States]needs a lot of government help and quantitative easing."

Slowing economic global growth, particularly in China, and the price of oil surging over $100 a barrel are potential headwinds to his outlook on resources. "The United States and Europe will have a hard time dealing with an oil price that keeps going higher right now because they consume so much of it," he said.

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The fund is now less than 15 per cent invested in gold stocks, a sharp decline from a peak of 40 per cent in 2009. "I don't like gold," Mr. Lamarche said. Investing in bullion has served its purpose with many investors piling into gold exchange-traded funds because of fears about the collapse of the financial system, he said. "But the world is starting to normalize again … There is risk that some holders and purchasers of gold may want to sell it in order to purchase more economically sensitive things."

Mr. Lamarche's fund has rebounded with a vengeance from the stock market meltdown in 2008, when it lost a stomach-churning 46 per cent. In 2009, the fund surged 131 per cent. It was holding about 35 per cent in cash prior to the downturn, and Mr. Lamarche used that money to keep buying stocks even as their share prices kept tumbling.

"We were buying things left for dead," he said. "It was a painful time - no question. But that was the reason why we exploded so hard."

Top Picks

Crew Energy Inc. :

The oil and gas producer's activities are concentrated in western Canada, but the driver of the stock near term is its Alberta-based oil play where growth in production, reserves and cash flow is being fuelled by new drilling technology, he said. "They also have a significant natural gas in British Columbia to which the world is giving no value, including myself [at the moment]I have owned Crew for a long time and am a big fan of its CEO Dale Shwed." This stock could reach $40 over the next two to three years, he said. The stock closed a share.

C&C Energia Ltd. :

Formerly known as C&C Energy Canada Ltd. before it went public last year, the company is an oil explorer and producer in Colombia where the business climate for energy companies has improved in recent years. "C&C is a well-run company with a strong management team," he said. "It has a great suite of assets and a clean balance sheet. They need to drill some good wells to grow the business from here." Its stock could reach the $17-level in a few years, he added. The stock closeda share.

Gasfrac Energy Services Inc.

The energy service company, which went public last year, has pioneered a new technology used in the drilling of oil and natural gas. While the liquid often used in fracturing rock formations is mostly water that can block extraction of some of the commodity, Gasfrac's method of using propane in liquid form can avoid that problem, and thus help reduce costs, he said. Gasfrac has a strong management team and clean balance sheet with cash and no debt, he said. The stock closed a share.

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