Top Fund Manager Sees Value in Offshore Drillers – Barron’s (blog)

By Amey Stone

Many energy sub-sectors have rebounded nicely along with oil prices. But thats not the case with offshore drillers.

It takes much higher energy prices for offshore rigs to be in demand, which is the main reason the sector has lagged.

But Jim Brilliant, portfolio manager ofCM Advisors Fixed Income Fund (CMFIX), a top rated short-term bond fund, thinks those higher oil prices are coming.

Meantime, bonds of companies like Diamond OffshoreDrilling (DO),Era Group (ERA), Transocean (RIG) and Rowan(RDC) look cheap relative to their future cash flows and have much wider spreads than other energy bonds, he says. Coupons are in the 7% range and some trade at discounts.

Brilliant believes demand for energy is going to rise sharply in the next five years, requiring more production than U.S. shale oil fields can muster. That will lead to higher crude prices and profitable offshore drilling.

The market still perceives there is global oversupply of oil and that shale will solve and fill gap, he says. We believe the gap is much larger than what shale can provide.

Brilliant is avoiding retailers due to the same energy dynamic, which he expects to lead to higher gas prices and lowerconsumer spending.

His fund has a 10-year average annual return of 4.68% putting it in the top 2% of Morningstars short-term bond fund category. It is up 8.5% in the past year.

With corporate spreads narrowing,Its harder to find values, says Brilliant, but were funding some.

Related reading: Barrons Jack Willoughby wrote thatTransoceansstock has potential to rise as much as 35% in this weeks issue.

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Top Fund Manager Sees Value in Offshore Drillers - Barron's (blog)