‘One of the opportunities is actually not in the commodities, but in the companies that help the world use energy more efficiently,’ says PenderFund’s Geoff Castle
Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're exploring alternatives as an asset class, with a focus on infrastructure in institutional portfolios.
While the energy sector has historically been underappreciated and largely left abandoned, one fixed income expert believes there’s still opportunity to be had.
"That whole complex, I think, has really been left for dead by investors," said Geoff Castle, lead portfolio manager of fixed income at PenderFund, pointing to traditional oil and gas, clean energy, and uranium. "But I think there's actually a fair number of reasons to believe that there's something better in the future for those securities and those companies."
For one, Castle believes oil is less compelling than natural gas. On a cost-per-joule basis, natural gas has traded at a steep discount to crude for two decades, sometimes just a sixth or a quarter of the price. Whereas oil's convenience for refining into gasoline has justified the premium, Castle argues that electric vehicles are steadily eroding that advantage by narrowing the spread between the two fuels.
That said, he stops short of calling oil oversupplied. The sector has seen years of underinvestment, and natural gas could tighten further since it often comes as a byproduct of oil drilling. Less drilling means less associated gas, which makes supply scarcer.
When he adds in the risk of Middle East disruptions or higher interest rates discouraging new field development, he sees forces that could hold back production and support prices. At current levels, he views energy equities and credit as attractively priced heading into 2026.
“Where the companies' relative fuel prices are represents a relative bargain. It's an area that we're definitely positive about for 2026,” said Castle.
Still, Castle stresses that the Middle East remains a core supplier of global oil and an area loaded with geopolitical risk. He sees the region as unstable enough that incidents like a blockage in the Strait of Hormuz or a serious disruption in Saudi Arabia could trigger a sharp oil price shock.
He also flags South America as another source of potential geopolitical risk, even if it is more remote. In his view, markets are not assigning much extra compensation in energy pricing or credit spreads for the possibility of a major disruption in any of these politically sensitive regions.
According to Castle, PenderFund is positioning for structural moves in energy prices rather than trying to trade short-term dislocations. The vehicle of choice is convertible bonds that sit close to the money, giving exposure to equity upside while collecting a modest cash yield in the 4 to 5 per cent range. He cites holdings in Bore Drilling, a Norwegian shallow-water oil and gas driller, and Northern Oil and Gas, a royalty operator in the US shale patch.
The appeal, in his view, is the asymmetric payoff. Oil could drift sideways in the 50s for an extended stretch, but a spike toward 100 would deliver gains of 30, 40, or even 100 points on these positions, he explained. He sees that upside optionality as worth holding given the geopolitical and supply risks he identifies elsewhere in the energy complex.
Yet, Castle argues the better bet may not be commodities themselves but the infrastructure that makes energy use more efficient.
"I think one of the opportunities is actually not in the commodities, but in the companies that help the world use energy more efficiently," he said, pointing to battery storage companies Fluence Energy and STEM, both US-listed, which help renewable power operators manage intermittency and optimize when they buy or sell electricity. These systems also provide backup capacity that helps stabilize the grid, a function Castle sees as undervalued by investors.
Beyond storage, he is drawn to uranium, even while the sector cratered after Fukushima, with bankruptcies wiping out many producers through the mid-2010s.
"There was a long, slow decline, and a lot of companies involved in uranium or nuclear power went bankrupt in the middle part of the 2010s. And then we've seen that kind of bottoming out and now we're actually seeing a kind of resurgence," he said, noting Saskatchewan’s uranium recovery has caught his attention.
Castle ultimately underscored that energy offers institutional investors something many of their recent allocations do not: liquidity. Unlike the long-dated, leveraged private market deals that have attracted institutional capital in recent years, energy exposure can be built through daily-priced public securities or managers who trade them, said Castle.
"You don't need to necessarily lock up for 10 years in a highly levered venture, the way that institutional investors have been wanting to do of late," he said.
That liquidity, combined with the sector's depressed valuations, creates a chance to diversify away from crowded trades while adding a more tradable sleeve to portfolios heavy on illiquid holdings. Castle argues the risk-reward in energy credit and equities is among the most attractive he sees.
"It is, to our view, one of the more interesting sectors from a kind of risk reward point of view, both in equities as well as credit here," he said.
