Six Comforting Contrarian Buys in Canadian Energy

by: Kurt Wulff

In uncertain times, investors can take comfort owning oil and gas resources through stocks in politically stable Canada. Canadian Natural Resources (NYSE:CNQ), Canadian Oil Sands Trust (OTCQX:COSWF), Cenovus Energy (NYSE:CVE), Encana (NYSE:ECA), Imperial Oil (NYSEMKT:IMO) and Suncor Energy (NYSE:SU) are in solid buy range at McDep Ratios of 0.65-0.80. Nor is there much competition to acquire choice investments since current stock prices below 200-day averages suggest that only a contrarian would be interested. At the same time, the resource outlook is improving as the companies further develop bitumen from oil sands and both oil and natural gas from horizontal multistage formation fracturing.

Accordingly, in 2010 we have modified our adjusted reserve life index for Canadian companies to recognize reported volumes of probable reserves in addition to proven reserves of oil and gas. Counting three-tenths of probable quantities, down from an initial five-tenths, and updating cash flow estimates, we raise Net Present Value (NPV) for ECA to US$50 a share from $42 and for CNQ to US$50 a share from $45. Cash flow forecasts and present value estimates for each of six companies take account of latest quarterly disclosures and daily commodity price settlements. Those estimates are sensitive to cash flow (Ebitda) margin estimated for the next four quarters.

Canada Enhances North American Energy Security

With trouble brewing in Iran as it did three decades ago, the greater availability of oil and gas from Canada is a welcome improvement in security. A completely new industry producing refined fuel from oil sands has sprung up and is growing rapidly to displace long distance imports. Thirty years ago, Canada restricted exports of natural gas. Now there is more capacity to ship the cleaner fuel than is being used during the current economic soft patch.

There are also environmental advantages in Canadian energy. Coal accounts for less energy production in Canada, relatively speaking, than in the leading global economies and leading global polluters, the U.S. and China. The surface area (footprint) of an oil sands plant is comparatively small compared to that required for solar or wind power for an equivalent amount of reliable energy delivered.

Finally, the most recent uptrend in oil price was short-lived . We look for positive trends in 2011 and 2012, perhaps beginning after the U.S. election in November. With that in mind, we believe the timing is good for patient investors to make new commitments.

Originally published on August 17, 2010.