Use access key #2 to skip to page content.

A GOOD Investment, for a change: Canadian Oil

Recs

23

October 31, 2007 – Comments (12)

So many people complain about top players getting scores due to underperform calls on bad stocks.  While I have scored a bit from the rocket cities and the escalas of the world, a good deal of my points have come from what I see as the absolute best investment right now and for the next 20 years at a minimum: Canadian Oil.

Why Canadian oil?  The answer is so simple that people try to make things harder than they are.  Here are the facts as I see them:

1. There is nothing imminent to replace gas in cars.  While solutions will be forthcoming, for at least the next 10 years good old petrol is what you and I will be putting in our vehicles.

2. Demand for oil comes in so many other ways - plastics, military, rocket fuel, infrastructure - how can anyone see demand for oil going down?

3. Supply - Now here we might argue a bit.  Some people talk about Peak Oil, and how we are going to have an actual decrease of oil in the near future.  Others may talk about abiogenic oil; in either case, I see neeither doom and gloom or significant new huge finds.  It's been pretty apparent for the past 2-3 years that the supply of oil has remained about steady, and even if it increases a little bit, there is still way more demand than can be met.  What no one can argue, however, is that new finds of easy to get to oil will be few and far between, as oil prospectors have to dig deeper and harder to find oil reserves.

4. Monetary Policy - What has likely driven the price of oil and in fact all commodities in the past 5 years.  Reflation and inflationary policies of central bankers all over the world, as well as goverments complicit and in fact encouraging these policies, causes true inflation in the things we need most - water, food, oil.  Oil is by far the most scarce, and most used v. all other commodities, and therefore will be most sensitive to inflation.  It is clear that Bernanke Fed is following in the footsteps of the Greenspan Fed, which is to have M3 run at about 9-13% per year, which after GDP is taken into account gives you real inflation of about 6-10% per year, and worse 16% if let's say we have a year long recession of -3% growth and 13% monetary inflation.  I truly wish this weren't so, because it destroys the value of the US dollar, and encourages speculation and discourages labor and savings, and this goes along with the current tax structure in the US.

This is a short explanation meaning: We are going to have inflation, huge inflation, very likely for the next 17 years of the Bernanke Fed.  He has made it abundantly clear that bank solvency is more important than the value of savings of Americans, of the value of benefits of older Americans, of the value of labor of the blue and white collar workers out there.  This inflation will show up hardest and biggest in OIL, due to the first 3 points outlined.  Some people talk about gold as being the best inflation hedge.  While gold will give you a store of value, if you want an investment, oil is the place to be.

I could make a case for gold miners, which I'm also bullish on, but not as much as oil.  Gold has use as fiat stores of value, but has very little inherent utility value, especially when compared to the usefulness of oil.  For a partial list of some of the things that we use oil for, check the following link: http://www.ranken-energy.com/Products%20from%20Petroleum.htm

So now, the question begs, why Canadian oil?  The best way I can explain it is by making the argument for my favorite oil investment: Suncor (SU).

Suncor is currently producing about 280,000 barrels of oil per day, and this number has been rising slowly but steadily this year and over the past few years.  They are one of the few oil companies with huge proven oil reserves that has increased their reserves, and will be increasing output in the future.  The estimate is for at least 325,000 bpd by 2012.  Please note, further, that management for SU is very conservative, and typically they underpromise and overperform, a hallmark of good management.

Now this might be the most important part of all: Suncor's business and operations are locatated in Canada, which have the following advantages:

1. Politically stable.

2. Democratic capitalist country, meaning 0% chance of nationalization.

3. No threat of terrorism

    a. no one cares about canada, except of course the US and China who need her oil

    b. Haji "the terrorist" al-bin Haji ain't going to go to the canadian outback and freeze his ass off to try to find a pipeline to blow it up, and even if he did, they'd fix it in three seconds and it wouldn't even slow down operations.

4. Close to US (just pour the oil in a pipe and send it to your customers - no tanker ships needed)

5. While canada does have environmental standards, the oil sands fields are so far out there, and in environments that aren't that hospitable, that strip mining and other potentially damaging things aren't as politically distasteful. There is no significant NIMBY factor (not in my back yard).

 

Let me leave with this: I am not currently buying suncor at 110.  At a p/e of 22, it's still a bit high, although not at bubble levels.  I would, and WILL, be a buyer if oil drops down to the low 60s.  My initial investment in Suncor came back in 1/07 when oil dropped into the 50's.  At that time Suncor had dropped into the upper 60s, which was a great buy at the time, and if for some odd reason it gets there again, would be a GREAT opportunity.  At this point I see a target price of Suncor of over 200/share, and a great time to buy would be below 80/share.  Below 90 might be a good investment.

The only downside factors are as follows: Socialist loving canadian tax-loving politicians taxing the hell out of the profitability of canadian oil (not very likely, but somewhat likely), and demand for oil dropping due to recession (haha, yeah right).

So there ya go folks.  Canadian oil.  You pretty much can't go wrong with it, try to catch it on a dip and you'll make some good cheese.   If you would like to see other canadian oil companies, you can check my player page - I green thumbed all that I could find, such as CNQ and ECA.

Best of luck to all. 

12 Comments – Post Your Own

#1) On November 01, 2007 at 1:24 AM, FleaBagger (29.37) wrote:

I'd make it more of a 10-15% chance of nationalization, but other than that, great article!

Report this comment
#2) On November 01, 2007 at 9:42 AM, freunddoggy (99.21) wrote:

Thanks DD, very good post.

I have a question, though. What other Canadian oil companies have their hands in the oilsands? I typically invest in smaller caps and wondered if you had any other plays that were similar, but smaller.

Thanks again!

-Freund

Report this comment
#3) On November 01, 2007 at 5:09 PM, martynanasi (98.62) wrote:

Pretty good article especially coming from an American. But Canada will be overall a place to invest not just because of oil but because Canada is a jewel in the oil & commodity arena. They have surplus in budget and trade accounts have an appreicating currency, political stability and good relations with almost every country in the world politically and economically. They are the global leader in many essential commodities which are in exponential demand...ie UR, Potash, gold, silver, zinc, nickel and so on and yes we do have the oil fields which is just a nice addition and will foster Canada to become one of the more influencial countries in the world. To mention that no one cares about Canada is absurb since the intelligent people know where it is going and isn't some blip on the economic scene. I guess it is just typical ignorance of the US in general as not caring about what is going on around them until they really have to. I have lived in the US and still work out the US but live in Toronto so I have seen both business cultures at work, thier markets and the politics involved in both countries. I work as a hedge fund manager in the top 5% of their universe and therefore we get better knowledge than most but in the near future Canada will be on everyones radar as the US gains a larger risk profile and people allocate their assets in less risky economies. It still memorizes me that people haven't caught on to the Canadian markets which have outperformed the US for several years. Hey I guess over par currency doesn't get people looking anymore. When I worked at Morgan Stanley I was amazed at how little supposely experts knew about commodities such as gold, silver, UR, potash etc. Sure they know about oil since they created the market place but I found Americans knowledge of what lies between the lines in commodity flucuation was modest at best. In the end I do aggree with you to some degree but wanted to expand your horizons that Canada in the hedge fund world is much more than just oil.

 

 

Report this comment
#4) On November 01, 2007 at 10:09 PM, floridabuilder2 (99.34) wrote:

I bought AAV and HTE, but gave both up in october bc i felt a correction was coming, especially when oil started moving up past 90....  i was hoping that the canadian canroys would go back to the previous tax rules and get the big spike...  i do have concerns about canada raising taxes on energy companies because they make too much money...  i too agree i will be a buyer of oil stocks if oil pulls back to the 60s....  i was going to buy spn today and even pitched it, but when i saw the futures... i chickened out....  hopefully we get a nice nasty correction fueld by us economy slow down... that will drive commodity prices down temporarily and hopefully allow great entry points...

thanks for the tip DD, i will put your rec's on my watch list

Report this comment
#5) On November 01, 2007 at 11:44 PM, DemonDoug (92.48) wrote:

Freund: here is a website with a list of some.

http://www.billcara.com/archives/2006/02/canadian_oil_sa.html

There are some speculative small cap Canadian oil sands companies that are not profitable yet if you want to speculate.

Also, Marathon Oil (MRO) just acquired a company that was a 100% oil sands company, and so now MRO can be considered a significant player there. 

Marty:

There are great things going on in canada from a business an economic standpoint.  There are also some not-so-great things.  For example, why are they raising taxes on the canroys and the oil sands profits when they are running a 13b national surplus?

That being said, like I said Canada is a great, if not the best place to invest, for all the reasons I stated and many you stated to.   Let me respond to something you specifically stated:

"To mention that no one cares about Canada is absurb since the intelligent people know where it is going and isn't some blip on the economic scene. I guess it is just typical ignorance of the US in general as not caring about what is going on around them until they really have to."

In the investing world, you are right, smart people know about investing in Canada.  While China bubbles away, and South America gains publicity by sinking into socialism, Canada is quietly becoming a great place to invest your money.  If you look at the CAPS tag for Canada, you will find a one-year return of over 36%.  I believe this is a fundamentally sound return at this time.

However, when I say "no one cares about canada," I'm not talking about it in an investing sense, but rather in a political and social sense.  Who the hell goes to vacation in Canada?  Ok yeah you got whistler and a couple of big cities, and 19 year olds can drink there - la de dah.  Montreal is not Paris, and Toronto is not NYC.  Canada has no enemies, it surely sends soldiers to some wars but they don't piss anyone off like their cowboy gun toting neighbors to the south.  Canada is probably most famous for saying the word "about" as "a boot."   The point is canada, despite being geographically big and full of resources, just doesn't have the sociopolitical and geopolitical drama of pretty much any other major economic power.  And this is a good thing!  While China bubbles up in a speculative fervor, Canada continues to plug along with great fundamentals as both of us have mentioned.  But really, unless a prime minister decides they want to nuke iceland or something, no one is going to think of canada and go "ooooh, now there's a place i really hate/love/never want to see/have to get to/should be blown off the earth/is the best place ever."

Also, you mention lots of other resources as investments.  I cannot argue with any of them - all of them make great bases for investment.  However, my thesis is that oil is the BEST to invest it, because for any of those other resources to be utilized, you need the energy and materials to mine and produce goods with them - and that takes oil baby.  The specifics mentioned - "UR, Potash, gold, silver, zinc, nickel" - I'm bullish on all of them, but not as bullish on them as I am on oil.

Florida: I too hope we get a nasty correction, because I'm tired of the high valuations.  Give me some sub-10 p/e's to invest in baby! 

Report this comment
#6) On November 02, 2007 at 1:35 AM, TMFBreakerMage (94.01) wrote:

Demon,

 

I totally agree with you on oil and what's funny, I totally agree with you about Altria too.  Your pitch on Altria is the same pitch I read over and over in my brain as I add to my investment.  Good luck...and enjoyed reading your views!

 

Report this comment
#7) On November 02, 2007 at 2:22 AM, oulous (56.87) wrote:

"The only downside factors are as follows: Socialist loving canadian tax-loving politicians taxing the hell out of the profitability of canadian oil"

 

Shame this just happened. Still a bright future for SU but this hurts a lot. 

Report this comment
#8) On November 02, 2007 at 11:22 AM, TDRH (99.76) wrote:

http://www.rigzone.com/news/article.asp?a_id=52080

Alberta Increasing Royalties could hurt Oil Sands.   Guess they have to pay for their health care system somehow.

 

Report this comment
#9) On November 02, 2007 at 4:41 PM, DemonDoug (92.48) wrote:

TD - yeah, they couldn't just use some of their surplus to pay for some health care I guess.

Mage: Altria is like the Canada of the US stock market.  It just sits quietly there, in plain view, paying a fat dividend, increasing value over time.  Altria is my main Roth IRA stock and one I am planning on owning for the rest of my life, I figure 30+ years of appreciation and Altria alone will make me a mult-millionaire. 

Report this comment
#10) On November 03, 2007 at 9:11 PM, ikkyu2 (99.38) wrote:

Thanks for the great post.  You've opened my eyes to the idea that Canada is a great place to invest.  I'll be looking over some balance sheets in the coming week.

As for vacation, back in the 90's when the exchange rate was ultra-favorable I loved vacationing in Canada.  Old Quebec City in February (the winter carnival) is magical, and Montreal, while not Paris, is a beautiful city worth visiting in its own right any time of year.

Sunday brunch at the old Chateau Frontenac is one of my fondest memories - the smoked fish in aspic is worth the trip by itself.

Report this comment
#11) On November 08, 2007 at 6:00 AM, nycguy (< 20) wrote:

great post.

However, a bunch of Canadian regional governments drastically increased energy extraction revenue royalties.  And  some projects, especially tar sand projects were no longer met profit estimates and had to be mothballed.

I do like Canada because (1) they don't try to blow us up, (2) geographical convenience, (3) zero sovereign risk, and (4) extremely stable economy.

Has anyone looked into oil shale projects in the United States.  The United States has an insane amount of coal and oil shale.  Apparently there were oil shale projects in the 1970's but the disappeared then Iran and Iraq started fighting each other and we got $14 oil.

I don't really think we are running out of oil.  Most of Africa is underexplored as is vast parts of Russia.  Latin American oil stocks aren't well developed either.  In addition, the United States has a massive continental shelf and off-shore drilling off could lead into some major fines.  We'll see if the Democrats change their stripes about Anwar and exploratory drilling when crude oil gets to $100+/bbl. 

Report this comment
#12) On December 15, 2007 at 4:03 PM, dwot (97.03) wrote:

I am going to wait for a correction beause of reduced energy from a down turning economy...

Report this comment

Featured Broker Partners


Advertisement