If the world economy gets better I’m going to make a lot of money in commodities because of the shortages, and if the world economy doesn’t get any better I’m going to make a lot of money in commodities because governments are going to print more money.
I don’t know about you, but I’ve pretty much given up watching the financial networks with hope of gathering intelligent financial advice. The problem I have is that most of the talking heads are willing to offer advice on every subject no matter their level of expertise or ridiculousness of the question. The most bothersome part for me is that if you asked most of them the same question tomorrow, chances are they would come up with a completely different answer -- because that is what happens when you make up your answer rather than simply saying, “I don’t know” when you are asked something outside your circle of competence.
There are, however, a few investors who are worth listening to. And you know who they are because they have an investment record that proves their ability and because they tend to support their answers with details from fundamental research. One of my favorites is Jim Rogers.
Rogers has recently been making the rounds on the various networks and his investment views really haven’t changed much in the last few years. Rogers is still bullish on commodities as he thinks we are in a long term bull market driven by supply limitations and emerging market demand growth. In this interview, he made the following comment:
How often are you presented with an investment opportunity that promises to work out no matter what the economy does? Usually you have to pick one side or the other. Are you bullish or are you bearish? According to Rogers, we should simply invest in commodities at then go to sleep for a few years.
And you have to admit that strategy has already worked out pretty well for Rogers. As far back as 1998, Rogers was bullish on commodities as that is the year he started the Rogers International Commodity Index. That index is up 340% since inception. You know how the stock market has done over that period.
In reviewing the material on the Rogers International Commodity Index, you can’t help but notice that 35% of it is weighted to oil (21% Nymex and 14% Brent). And oil is where I have chosen to focus my investments, because in my mind the supply and demand challenges facing the world are impossible not to see.
In his book Hot Commodities, Rogers basically summed up the world’s challenges with oil in his first sentence on the subject “No major oil field has been discovered in the world for more than 35 years.” It isn’t hard to get your head around the implications of that fact. We spend more money looking every year and have far superior technology available than we did a few decades ago. Yet we haven’t found another super giant oil field despite decades of trying. The easy, cheap stuff was found long ago.
Right now, in the Canadian equity market I think we are being presented with an excellent buying opportunity in small and medium sized oil producers. Despite oil that is near $100 these companies have sold off quite significantly in 2011. This has created a pretty large gap between the value of the assets these companies control and the value the stock market is assigning to them. At some point in time either through stock price appreciation or corporate transactions I expect that gap will be eliminated. I’ve assembled a basket of Canadian oil producers and for the first time in a long time I am pretty close to being fully invested. Here are my favorites (with a brief description of why) that you might wish to due further due diligence on:
Petrobank Energy (PBKEF.PK) – Buying today you pay only for an undervalued subsidiary company and get significant parent company assets for free.
Novus Energy (NOVUF.PK) – Your entry into the emerging Viking play, pay for booked reserves and get much larger undeveloped acreage for free.
Westfire Energy (WFREF.PK) – Same as Novus, but now includes a cash flow engine via a merger with Orion Oil and Gas that allows them to exploit vast acreage.
Skywest Energy (SKWEF.PK) – Sitting on large Cardium acreage position and is a sitting duck due to depressed share price to be acquired soon.
Second Wave Energy (SCSZF.PK) – Your entry into the emerging Swan Hills play, surrounded by larger companies one of which will acquire it.
I’ve got a few more in addition to these and my intention is to be like Rogers and just sit on my hands with oil price fundamentals on my side and let the market realize the true value of these companies. I expect that by this time next year we are going to have a very tight oil market and that an acquisition wave will accelerate the value realization process for me.