It goes without saying that George Soros is easily one of the smartest investors in the world.
Given his stellar investment record, it’s always a good idea to keep tabs on what industries Soros is banking on next. Here’s one that might surprise you.
George Soros is putting his money on the energy sector.
Don’t believe me? The billionaire investor has built up enormous stakes in companies such as Devon Energy Corporation (NYSE:DVN) and Transocean Ltd. (NYSE:RIG). (Source: Reuters, last accessed August 10, 2015.) You couldn’t ask for a more obvious big-name signal that oil and gas prices will rise, and that the oil patch is ripe for wise investing.
He has also just picked up another play.
Producers in the Canadian prairies have been hammered home by a harsh lesson in economic fundamentals. Extracting crude from the oil sands is a long and costly affair, and virtually unprofitable in today’s low-price environment. Razor-thin profit margins are a fact of life in all but the highest oil price periods, and today they are all but nonexistent.
So why would a billionaire known for making some of the greatest investment plays bet on the Canadian energy sector?
Because George Soros knows a winner when he sees one. That’s why he’s fattened his energy portfolio with shares of Suncor Energy Inc. (NYSE:SU). (Source: Soros Fund Management LLC 13-F Filing, last accessed August 10, 2015.)
The basic issue faced by producers both large and small is that the cost of producing a barrel of crude oil does not change when the price of oil drops. The result of a decline in price is that profits all but disappear, and debt refinancing and cash flow maintenance are your only options for survival.
The result? Everyone goes through economic pain, and all the best-positioned companies will survive. In practice, it will be almost without exception that small drillers and producers, who are essentially running on financial fumes, will quickly find themselves without access to debt financing.
It’s at that point, when the market begins to squeeze out the unprofitable and start reigning in production numbers, that we’ll start seeing a return to healthy supply and demand fundamentals. Prices will then inevitably rise, and the savvy investor who snapped up stocks in a low-value moment will reap the rewards.
Commodities such as oil will always go through demand cycles, some worse and perhaps longer than others, but a recovery is all but certain. Large companies such as Suncor are able to weather the financial storm of low oil prices and are an excellent way to play a recovery.
Furthermore, once prices begin to rise, their very size and stability will cause their share price to outpace even that of oil.
That’s why George Soros is betting on Suncor. It’s large, stable, and has the resources to ride out the decline in prices. Soros knows this, and with history on his side, is well-positioned to reap the benefits of a wise investment. And he’s certainly not the only billionaire to recognize a temporary low when he sees one. Warren Buffett increased his stake in energy giant as well.
Before you begin thinking this investment over, keep in mind that what I’m saying isn’t exactly a secret. The big names have been quietly positioning themselves for an eventual recovery, and it has not gone unnoticed.
Do yourself a favor and make sure that if oil shoots back up to $100.00 per barrel, you’re one of the investors patting themselves on the shoulder not cringing at the missed opportunity.