(March 18, 2013) - Ontario Teachers' Pension Plan is going direct—very direct—in its oil investments.
The $115 billion fund, which is one of Canada's largest public pensions, has sold off a C$430 million pipeline investment, and closed its first acquisition for the new natural resources group: a 4.9% interest in a Saskatchewan oil-producing unit for $153 million.
The first transaction handed over the fund's one-third ownership of the 1,717-mile Express-Platte Pipeline system to Spectra Energy. Ontario Teachers' had held the pipeline in its $9 billion infrastructure portfolio since 2003. The pipeline carries crude oil from American and Canadian producers in the Rocky Mountains to refineries in the Midwestern states.
The pension fund pursued the second asset, the Weyburn Unit, for its "long-life reserves." It is a mature production area: Weyburn has been in operation for four decades, and still turned out roughly 25,000 barrels in 2012. The fund called it "a predictable production profile and free cash-flow generation—all attributes the natural resources group is seeking for its portfolio."
The group itself was only established a few months ago, with the intentional of combining Teachers' instrument-heavy commodities exposure with direct physical investments in producing natural resources.
"The group's broader goal is to provide the plan with superior risk-adjusted returns, diversification and protection against adverse macro-economic environments that could lead to unexpectedly high inflation," the fund said. Its portfolio currently includes timberlands and physical Canadian oil and gas holdings, and the investment team is looking at agriculture and mining assets.
Commodities have a reputation for high volatility. In the past year and half, the spot price of West Texas Intermediate crude oil has ranged from $75.40 a barrel (October 11, 2011) to a high of $109.39, which it hit just over five months later.
Still, according to a recent paper by British Columbian commodities scholar David Jacks, the asset class in general follows pricing "super-cycles" which are much longer term than most investors account for. "Much of the conventional wisdom on long-run trends in real commodity prices may be unduly 'pessimistic' about their prospects for future appreciation or unduly swayed by events either in the very distant or very recent past," Jacks wrote. "At the same time, the accumulated historical evidence on super-cycles suggests that the current super-cycles are likely at their peak and, thus, nearing the beginning of the end of above-trend real commodity prices in the affected categories."