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Selectively drilling down into energy stocks

Demand for conventional energy sources likely will not decrease significantly over the next five years or so, according to Fidelity’s Chris Lin. Nonetheless, that should not be construed as a denial of the tremendous importance of addressing climate change.

At this point in time, hydrocarbons such as oil and natural gas are still the most energy dense, scalable, and lowest-cost forms of energy, explains Lin, portfolio manager of Fidelity® OTC Portfolio (FOCPX).

As an investor, he is drawn to companies with business-model and growth durability in excess of what the market expects. As a result, Lin looks for firms that possess a competitive advantage, pricing power, and strong management teams, as well as events that might provide a business catalyst—such as product cycles, a change in management, and turnaround situations.

On the supply side, the world has underinvested in energy infrastructure for the past seven years or so, as he sees it. Consequently, the portfolio has owned stakes in Diamondback Energy (FANG) and Hess (HES), which Lin views as two of the better exploration and production companies. The former is an independent oil and natural gas company focused on the exploration and production of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas, he points out.

Hess, on the other hand, is intriguing to Lin due to its 30% stake in the Stabroek Block, located off the coast of Guyana, where about nine billion barrels of oil-equivalent resources have been found since 2015.

“In other areas of the energy sector, the portfolio has included exposure to several services providers, most notably SLB (formerly Schlumberger) (SLB), Halliburton (HAL), and TGS ASA (TGSGY),” says Lin. “These firms are vital to the broader energy sector by providing drilling, pumping, and transporting, as well as the data and analytics necessary to extract raw commodities out of the ground and into the refiners for processing.”

He concludes that despite the competition from alternative energy sources, Lin foresees greater exploration activity in response to elevated oil and gas prices, which could benefit energy services companies.

Securities mentioned were fund holdings as of December 31. For specific fund information, including full holdings, please click on the fund trading symbol above.

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