TIM GUINNESS IS RELUCTANT to take too much credit for much of the run-up in his Guinness Atkinson Global Energy Fund.

"You could have employed a monkey, and he wouldn't have done too badly,'' says Guinness, referring to the big gains made in the oil and gas patch during the past few years.

It's easy, of course, to be modest when your 15-month-old fund is handily beating its peers. In the past year, the Guinness Atkinson Global Energy Fund, which Guinness co-manages, has gained 94% -- outpacing by 44 percentage points the average natural resources fund tracked by Morningstar.

Guinness, a Briton who enjoys hunting foxes, attributes the fund's outsized success to his past focus on exploration and production companies. Many of these companies have handily outperformed the larger household-name integrated oil companies that he has shunned.

Recently, he discussed what he's doing with his fund now that many of its better-performing stocks may have had their day.

Barron's Online: Like many energy funds, most of your global energy fund is made up of either integrated energy companies or companies that focus just on exploration and production of oil and natural gas. Right now, which of these two sectors is getting most of your attention?
Guinness: I can tell you I have been nudging up my exposure to the integrated companies.

Q: And why is that?
A: Because the pure-play exploration and production stocks have moved strongly. They have outperformed the integrated companies.
The integrated companies used to have a ball and chain around their legs, which was their refining business, and that's now much improved. And so the valuation gap [which caused the integrated companies to trade at deep discounts] has greatly diminished.

Q: Name one integrated company that you like right now.
A: Chevron (ticker: CVX). I bought it in September 2004. I'll add to it as I get inflows into the fund, but it currently maintains the 3.7% stake.
The stock hasn't been a particularly good call. [Editor's Note: Chevron, while outperforming the broader stock market in the past year, has trailed other large integrated energy companies such as Exxon Mobil and BP.]
But I think that Chevron is one of the cheapest of the larger integrated companies around. It has a price-to-earnings multiple based on 2005 earnings of about 9.4x, whereas you see a company like an Exxon Mobil at more than 12x.

Q: Granted, Chevron stacks up as a value. Where is the catalyst to move the stock price up?
A: You never know what moves stocks. I have a philosophy that if you buy stocks that are cheap in relative terms, you can sit on them and eventually the market will re-evaluate them, and their intrinsic cheapness will be arbitraged away.

Q: But the markets are choosing not to give Chevron the same kind of multiple as an Exxon or BP. Why?
A: There have been worries about [where] Chevron was going strategically. They've got a good refining business; they've been doing things in the Gulf of Mexico. I think they have, in a quiet way, been just going about their business professionally. If I can't really see that Chevron's prospects are worse than Exxon's, why would I hold Exxon, if it is that much more expensive?

Q: You own a lot of Canadian exploration and production companies such as Canadian Natural Resources, Petro-Canada and OPTI Canada. And many of these companies have exposure to oil sands -- which is viewed as a potential new source of oil even though it's more expensive to extract this oil. Do you see oil sands as a theme in your investing at all?
A: Very much so. Virtually all of the Canadian companies have an oil sands angle to them. I'd say that 12% of the total portfolio is exposed to oil sands versus other energy sources.

Q: What are you betting when it comes to oil sands?
A: There are a million barrels a day of oil now produced from tar sands, and that's going to rise to three million barrels a day over the next eight years or so. The costs of producing this oil is somewhere between $22 and $25 a barrel.

Q: At what point does crude oil have to be before it makes sense to extract it from the tar sands of western Canada?
A: At a cost of $25 a barrel to extract oil from sand, a $30 price for crude oil makes it an OK business -- not brilliant but OK. But at $50 a barrel, it's become a brilliant business. Doing the crude math, at $30 a barrel, you're making $5 a barrel and at $50 you are making $25. Your profit has just gone up fivefold.

Q: Today, only about a million barrels a day of oil is produced from tar sands, out of a total worldwide crude oil production level of more than 80 million barrels a day. And in three years, oil from tar sands of perhaps three million barrels a day will have only a slightly higher percentage of total worldwide production of perhaps 90 million barrels or so. Isn't that still a drop in the bucket?
A: Yes. But supply is getting harder and harder to grow. During the oil crisis of the 1970s, we went out and found and developed new oil in places like the North Sea, Alaska, and even the Gulf of Mexico. We need to find more sources of oil, and oil sands are part of that effort.
And if you look around, there is Russia, there is the Caspian Sea, West Africa, the Canadian tar sands and Brazil. So, there are these places, but none of them are that huge in their own right.

Q: I noticed that you have a small exposure to coal -- Peabody Energy (ticker: BTU) is one of your holdings. Are you still bullish on Peabody, the largest U.S. coal operator, now that its shares have gained more than fivefold in the past two years?
A: Peabody is a stock that is going to double in my opinion in the coming years. The company produces both eastern and western coal, but I particularly like the prospects for western coal, which is mostly produced in the Powder River Basin of Wyoming.
This western coal has a lower energy output per ton -- about two-thirds of eastern coal mined in Appalachia. But these large coalfields in Wyoming are quite low in sulfur pollution, so that made them environmentally much more attractive.
As a result, this low-sulfur coal has found a ready market. It's grown to about 20% of the U.S. coal consumption.
And this coal has been moving up. It's [been] trading at about $10 or $11 a ton and, in my view, it is going to $20 a ton. Prices have risen across the board for both eastern and western coal, but there has been a lag in the rise of western coal, which means that there is this extra value to come through. (See Weekday Trader, "Canaries May Sing in Massey Mines," July 20, 2005.)

I am very happy to own this stock over the next three years.

Q: Thanks for your time.