What does the Gulf oil spill mean for oil stocks from an investment perspective?
The accident in the Gulf of Mexico and the subsequent oil spill that continues are tragic events, no question. I believe we will see additional costs and regulations that will affect every company involved in all aspects of the oil industry. Of course, those companies that have significant activity in the Gulf of Mexico may be affected more, but ultimately, operational costs will likely go up for the entire industry. The incident also creates the added risk of increased regulation outside of the Gulf of Mexico. It is just too early to determine the scope and results of these changes.

Besides BP, which types of companies will feel the effects in the near term?
The uncertainty surrounding operations in the Gulf of Mexico will create both winners and losers in the near term. The U.S. government has declared a six-month moratorium on new deepwater drilling. As a result, the biggest negative will be to those companies providing services to oil companies, such as the drillers and large service companies that supply the offshore rigs. The oil production companies are not as greatly affected by the moratorium. It is our belief that drilling eventually will resume in the Gulf of Mexico. So it is likely that these companies will see projects delayed but not eliminated altogether. Oil companies without significant assets in the Gulf should perform the best over the next few months, because they are not subject to the near-term uncertainty around new regulations.

According to the U.S. Energy Information Administration, 43% of the oil consumed in the United States is domestically produced and 57% is imported. Will the Gulf spill and the increased regulatory scrutiny have any long-term effects on the United States’ dependence on oil?
The Gulf of Mexico represents about 20% of U.S. production, and most if not all of the growth is in that production, so the spill has serious implications. I think we will see improved regulations and oversight, which the industry will likely not resist. For the consumer, unless this spill results in a material change in the demand for energy, over the long term those regulations will likely mean an increase in the price of oil. The impact on oil prices should not be felt immediately, however, because most of the current activity in the Gulf is geared toward oil production two to three years in the future.

Are there any types of companies that could potentially benefit from increased regulations and oversight?
Longer term, oil service companies, which have been hurt in the near term, could benefit from changed regulations. I would expect that we will see more redundancies in safety equipment, more technically sophisticated oil-well designs, and more safety testing during the drilling process. I believe the oil industry possesses the technology to drastically reduce the odds of this type of event from happening again, but nothing in the world is ever 100% risk-free. The best approach is going to ensure that the industry develops and follows best processes and methods.

Has the Gulf of Mexico disaster altered your strategy in managing the fund?
Shortly after the Gulf spill began, we greatly reduced, but did not eliminate, the exposure to companies directly involved in the accident. Since then, we have continued to monitor developments and are working to understand the legal framework that will ultimately come into play for the various companies. As is often the case, we believe that the market overreacted in some cases, and we have actually been adding to positions in some companies. The combination of developments at the oil spill site and the changing political landscape make this exercise an almost daily occurrence. We are actively managing the portfolio to take advantage of any opportunities and to manage risks where we think it is appropriate.

As of 4/30/10, BP represented 4.95% of the fund’s portfolio. Allocations will vary over time.