Canada supplies more oil and gas to the United States than any other nation. It is also one of its closest allies, both literally and figuratively. Many of the Canadian petroleum companies are publicly traded in the United States.
Many Canadian petroleum companies trading in the U.S. also provide above-average dividends compared to the broader market. Canadian-based companies generally pay their dividends in Canadian currency, which is largely natural resource-backed.
During 2011, the Canadian dollar weakened versus the U.S. dollar, due to price reductions for various commodities such as gold and oil, and dollar strength due to European sovereign concerns, among other factors. Nonetheless, the Canadian dollar has been relatively strong since the financial crisis of 2008, primarily due to the strength of gold, oil and other natural resources. The future strength or weakness of the currency will likely follow the strength of the ample resources Canada holds.
Below is a recent performance table for seven Canadian oil and gas equities that trade within the United States (listed in alphabetical order): Baytex Energy Corp. (NYSE:BTE), Cenovus Energy Inc. (NYSE:CVE), Enbridge Inc. (NYSE:ENB), Enerplus Corporation (NYSE:ERF), Pengrowth Energy Corporation (NYSE:PGH), Provident Energy Ltd. (PVX) and Penn West Petroleum Ltd. (NYSE:PWE). I have included their one-week, one-month and 2012-to-date equity performance rates, as well as their current yields.
So far in 2012, the best-performing listed equity is Provident Energy, which largely moved up immediately following the company's January 16, 2012, announcement that it will be acquired by Pembina, another Canadian oil and gas company. Since then, though, Provident has performed comparably to the broader group. The only two listed equities that are down from their 2012 starting prices are ERF and PGH, the two highest yielding listed equities.
2011 was an extremely volatile year for oil prices, starting with appreciating oil on account of instability within the Arab world, some of which is still not resolved and which may still be in its infancy. By late Spring 2011, oil prices began to decline on demand concerns. Prices remained depressed until the fourth quarter of 2011, and have remained strong through the first two months of 2012. Now, Iranian nuclear concerns and possible military responses are adding another potential elevating force to oil prices.
Most Canadian oil and gas equities followed oil's price fluctuations over the last few quarters. The current relative oil strength will bode well for these companies, as well as for the Canadian dollar, provided it can continue. Additionally, several have significant reserves of natural gas, which some now speculate may have bottomed out after a prolonged period of decline. Of course, if oil corrects to the downside, these equities are likely to follow it down.
Most Canadian oil and gas companies were Royalty Trusts ("CanRoys") before changes in Canadian law eliminated CanRoys. These trusts were similar to U.S. MLPs in that they avoided corporate taxation by passing most of their income to shareholders. After Canada eliminated these trusts, most of them converted into corporations. Some may need to further restructure themselves or their dividends in the coming quarters, as many have tax credits that will eventually expire.
Disclosure: I am long PGH.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.