O Canada! (Part III): Black Gold, Natural Gas and Growing Dividends Too 16 comments
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I have previously discussed the investment merits of what the World Bank calls “the soundest banking system in the world” and the gold (and golden agriculture) that flows from Canada. Now I’ll review the black gold that, atop the foundation set by the previous sectors, may prove to be the most profitable of all.
If there is to be a retrenchment over time in the value of the US Dollar, as there has steadily been for the past 100 years, I believe commodity resources in general (mining, agriculture, energy, and precious metals) will benefit. As the USD declines in value, nations abundant in those commodity resources will retain the value of their currencies far better, thus producing profits when repatriated into US Dollars in addition to the profits that accrue to well-managed companies anywhere.
To me this combination of well-managed companies in a sound business and banking environment in the aforementioned sectors screams “Canada.” And nothing bellows Canada like “oil.”
The oil and natural gas that is imported into the USA from Canada doesn’t have to pass through the Straits of Hormuz; escape the clutches of a thieving tyrant like Hugo Chavez from Venezuela; or overcome popular resentment and revolt from Nigeria. Instead, it simply crosses via pipeline, rail and truck across the longest undefended border on earth, between two great friends, who happen to be each other’s biggest trading partners.
If you were struggling to find a definition of “serendipity,” this might just be it.
Canada is already the USA's biggest” foreign” source of energy. The future bodes well for even more significant finds and even greater cross-border purchases by Americans. Let someone else worry about Saudi Arabia’s shaky monarchy – or, better, let that monarchy realize it needs us more than we need it. Then we’ll see how much funding of terrorist organizations they slyly slide under the table.
Which of the Canadian oil and gas companies stand to reap the most serendipitous rewards from this current and future partnership?
First in my mind would be Imperial Oil (IMO). I first started buying Imperial Oil 30 years ago. It is Canada’s oldest and biggest oil company with operations in all sectors of the industry, from exploration and production to refineries and gas stations. Exxon (XOM) owns 70% of the company and I figure Exxon might just know a thing or two about finding value in the oil patch.
At its current rate of production and consumption IMO has 140 years worth of proven oil and gas reserves, without ever drilling another new well, so they have the luxury of focusing on oil sands and natural gas right now. And Canada still has massive tracts of “frontier” land that we are just now developing the technology to survey and explore for possible mineral and energy resources. You can bet IMO is tying up as much as they can.
In oil sands alone, Canada has as much oil as Saudi Arabia. The Saudis can get it out of the ground for about $3 a barrel. It costs the oil sands miners/drillers more than 10 times that amount. Still, with oil at even $60 a barrel, that puts big pressure on OPEC and the Russians and others to keep their prices in check or risk being sidelined in The Big Show.
Next is Encana Corp (ECA). While IMO is the biggest oil and natural gas company in Canada, ECA is the biggest natural gas company in Canada (and, indeed, in all of North America). As the largest natural gas producer on the continent, they produced 1.4 trillion cubic feet of natural gas in 2008. Both IMO and ECA are incredibly conservatively-managed, solid-balance-sheet, and intelligently-hedged companies that befits their age and experience.
Chesapeake Energy (CHK) is a relative newcomer. CHK is the most active driller of new wells in the U.S., which I believe will see far more discoveries in the shale trends than will Canada. And they are now entering exploration and production agreements with some key Canadian firms.
Please note that IMO and ECA are rock-solid dividend-growers with what I consider A or A+ balance sheets. CHK is a bit less rock-steady but still a fine company.
Here are three more (affiliated) steady-Eddie Canadian energy companies I offer for your consideration, all of which I just reminded our Investor’s Edge ® subscribers about in our October issue with the following comments:
Enbridge Inc. (ENB) operates, in Canada and the U.S., the world’s longest crude oil and liquids pipeline system. The company owns and operates Enbridge Pipelines Inc. and a variety of affiliated pipelines in Canada, and has an approximate 27% interest in Enbridge Energy Partners, L.P. (EEP) which owns the Lakehead System in the U.S. and is an old favorite of mine going back decades rather than years.
These pipeline systems have operated for over 55 years and now comprise approximately 8,500 miles of pipeline (see map on the next page.) ENB and EEP deliver more than 2 million barrels per day of crude oil and liquids to end customers. Enbridge is also the sponsor and manager of the Enbridge Income Fund (EBGUF.PK).
In addition to supplying oil, gas and other energy-related liquids via their proprietary pipelines, Enbridge also markets these products, is getting more deeply involved in the natural gas transmission and midstream businesses, and distributes energy. (ENB owns and operates Canada’s largest natural gas distribution company, Enbridge Gas Distribution, which provides gas to industrial, commercial and residential customers in Ontario, Quebec and New York State. Enbridge distributes gas to 1.9 million customers -- and is developing another gas distribution network in New Brunswick.
Beyond all these activities, ENB is also becoming a major player in renewable resources and in addressing the pollution problems of fossil fuels. Their Alberta Saline Aquifer Project (“ASAP”) is an initiative to identify deep saline aquifers in Alberta that could be used in a carbon dioxide sequestration pilot project. (Saline aquifers are underground formations containing brine or salt water that is not suitable for agricultural purposes or for drinking, but might be a great place to remove carbon from the atmosphere and place it back underground -- from whence, in a slightly different form, it came…)
Then there is the Ontario Wind Power Project. Roads and other infrastructure are in place to support the 250 feet high wind turbines at this wind farm that is designed to generate just over 180 megawatts. Here’s what I like about Enbridge -- ENB -- and its US subsidiary MLP, Enbridge Energy Partners -- EEP -- which is designed more for steady income without the potential perhaps for as much gain as these major projects come to fruition for ENB. First, it’s a simple business model. There’s no human genome model that must be figured out, no gene-splicing, no nano-miniaturization, etc. Just a good solid product that every other industry -- biotech, computers, food production, whatever -- depend upon: energy
Next, they are the biggest at what they do. They command respect within the industry and have to be on the short list of anyone looking at a really big gathering, pipeline, transportation and/or distribution system. More than 90% of their business is regulated. This means their profit margins will never take off into the stratosphere but also ensures a steady cash flow and a virtually recession-proof business model.
They have limited exposure to price fluctuations in the commodity energy products the gather, transport and distribute, but benefit from any increase in the overall usage of these products. They are really good risk managers. Risk management has to come before profit maximization in order for profit maximization to occur. It’s too bad US bankers and brokerages have never chosen to learn that lesson.
85% of their revenue comes from existing long term contracts! Maybe that’s why they are rated A- by S&P in an age where A and A- companies are rare as hens teeth.
ENB’s 10 year compound average dividend growth is 9.5% per year. (The dividend increase in 2009 -- yep, 2009, year of dividend cuts for most firms, was 12%. This brings them to a yield of 3.7%.) EEP of course yields far better, as befits a pipeline MLP: 8.8%. What you gain in income, however, you are likely to give up in growth. Either firm is top drawer, in my opinion -- it just depends upon whether you want more current income or greater growth in the future.I should also mention something about the Enbridge Income Fund (EBGUF.PK in the USA). This is an open-ended Canadian trust operating in three primary business segments: Alliance Canada, Saskatchewan System, and Green Power. Alliance Canada includes the Fund's 50% interest in the Canadian portion of the Alliance System (pipelines taking product to the USA.)
The Saskatchewan System owns and operates crude oil and liquids pipelines systems connecting producing fields in Southeastern Saskatchewan and Southwestern Manitoba with Enbridge’s mainline pipeline, for transportation to the United States. And Green Power includes entities that produce electricity via alternative energy sources and consists of a 50% interest in each of NRGreen and the SunBridge wind project, as well as a 33% interest in each of the Magrath and Chin Chute wind projects. The fund distributes its payouts monthly and currently yields just over 11%.
There are so many other fine exploration and production companies, pipeline MLPs, and Canadian Royalty Trusts that I can’t possibly do them justice in one article. I’ll continue to identify other candidates for your consideration. They’re just too good to ignore…
An important PS: For those who need the diversification of an ETF or closed-end fund, may I suggest the iShares MSCI Canada Index ETF (EWC). My only caution is that it’s already up nearly 90% from the March lows. It still represents value and, on any pullback, serious value. It is heavily weighted in two of my favorite Canadian sectors, financials (at 34%) and energy (with about 28%.)
Full Disclosure: Long IMO, ECA, CHK, ENB, EEP and EWC.
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless –our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running but there is no guarantee that we will continue to do so.
It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.
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This article has 16 comments:
One response to this piece: I would've preferred to hear your take on the upcoming tax-status change on canroys and where you see future fair value and dividend payouts/yields.
I would recommend the following additional Canadian petrocompanies:
1) Encana, major gas producer in Canada & USA, dividend =2.7%
2) Suncor, 40 yrs oil sands reserves, low debt, dividend = 1.1%
Income Trusts
1) Canadian Oil Sands, 40 yrs oil sands reserves, low debt, dividend = 3%
2) Enerplus, 45% gas & 55% oil, dividend =9%
3) Penn West , 30% gas & 70%oil ,dividend =10.5%
2008 year-end proved reserves were 2.3 billion boe. The combined oil, NGL and natural gas production during the second quarter of this year was 236 000 boepd. By my calculations IMO's current proved reserve life index 26.7 years, which is little less than 140 years.
On Oct 11 10:47 AM a. palmer jr. wrote:
> I'm hoping that with the advent of electric cars and people's awareness
> of the need to conserve, that the figure of 140 years might be very
> close to correct. It is my hope that soon we can stop buying any
> oil or anything else from the middle east. It always seemed stupid
> to me to give money to people that hate us.
As pointed out correctly, big chunks of business in these companies is regulated by provinces, which ensures some of the most stable income streams in any business model. Other good companies to look at include Enerplus Resources Fund, Pembina Pipeline Income Fund, ATCO, Transcanada.
For more analysis, check out my blog: youngandinvested.com
I have owned it also for several years and the total return is fantastic.
It is the only stock in my portfolio that is currently a "buy and hold" except the VGNEX which I have held for 16 years. It has been my "fixed income " allocation and it has been like owning a slot machine rigged in my favor.
If you want more ideas for great Canadian companies with 8% plus dividends with solid businesses that can sustain and grow them, check my posts from 2/9-5/9.
Crude oil shot up to $150 and fell to $30 but now at $74 which is the ONLY reason Canada has fared well . Canada wasn't leading the world when crude was at $11 in 1999.
The grass is not always greener on the other side.....
> Well , try the 45% tax rate at highest income, $3.50 per gallon of
> gas today , universal healthcare that people die waiting for ,5 months
> of winter and see how you feel.
> Crude oil shot up to $150 and fell to $30 but now at $74 which is
> the ONLY reason Canada has fared well . Canada wasn't leading the
> world when crude was at $11 in 1999.
> The grass is not always greener on the other side.....<
You purposely failed to mention that beer is free in Canada, didn't ya? You have an agenda.
I have read a couple of your articles on Seeing Alpha and like them a lot.
In a couple of your articles you mention your publication "Investor's Edge". Im am interested in learning more about this publication. Can you please tell me a little bit more about it and also how one can subscribe and what the costs are?
Thank you in advance and I look forward to hearing from you soon.
Kind regards,
J. Berendsen