Home > The Keystone Delay Won’t Stop These Canadian Oil Sands Stocks (ENY, SU, USO, PBN, COS, CPG, BTE)
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The Keystone Delay Won’t Stop These Canadian Oil Sands Stocks (ENY, SU, USO, PBN, COS, CPG, BTE)

February 7th, 2012

Martin Hutchinson: I’m not a knee-jerk hater of the  Obama administration.  But the President’s decision to  reject the Keystone pipeline was one of his worst.  Aside from creating jobs, the  pipeline would have decisively swung U.S. energy supplies more toward domestic  sources and those of our friendly neighbor Canada.

Granted, the pipeline wouldn’t create energy independence but it would mean importing less oil (NYSEArca:USO) from the Middle East.

It is the kind of switch that could help save the U.S. large amounts of blood and treasure in the future.

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Because in practice, our  dependence on Middle Eastern oil forces us to incur huge foreign costs – after  all, we just finished paying $800 billion for the Iraq war. As you know, that is just a drop in a much  larger bucket.

Add in the human losses and the  costs are incalculable.

In this case, caring less about  what goes on in the Middle East – other than ensuring the safety of our ally  Israel – would save us all those costs, and get us that much closer to  balancing the damn Federal budget.

So let’s just say shelving the Keystone pipeline wasn’t exactly the president’s finest hour.

Bullish on Canadian Oil Sands Stocks

However, while the Keystone Pipeline continues to twist in the wind, investors shouldn’t ignore the  Canadian energy sector – especially the Athabasca tar sands.

Because with oil prices on the  rise, these Canadian resource plays are likely to offer investors serious  returns.

Here’s why: oil prices are headed higher.

In fact, Fed chairman Ben Bernanke’s recent promise that U.S. interest rates will remain near zero until  the end of 2014 has given a huge boost to commodity and energy prices.

What’s more, the $600 billion  injection into EU banks and the promise of another $600 billion this month just  adds more fuel to the inflationary flames.

Eventually, oil prices will get so  high that they will cause a recession all by themselves, just like they did in  2008. But remember, that happened at  $147 per barrel, so we’ve still got quite a way to go. This time oil could get  closer to $200 per barrel.

That’s bullish for places like the Athabasca tar sands.

On the flip side, if oil prices were low, you would need to look at companies exploiting areas with the lowest  extraction costs like the Middle East or Nigeria. At lower oil prices, the temptation for the  local governments to play games with foreign oil companies would be modest, so  if you had access to cheap supplies you’d do very well.

In this scenario, high-cost  supplies such as those in the U.S. oil shale and Canadian tar sands would struggle.

However, in today’s environment of  high oil prices, political stability is much more important than cost. The  higher the price, the more low-cost supplies in unstable areas are subject to  expropriation by the local politicians.

Conversely high-cost supplies in  stable areas are highly profitable, and would attract most of the new  investment.

How to Invest in the Athabasca Tar Sands

The Keystone  pipeline decision is certainly a pity for the United States – though it may be reversed after the November elections.

However, it doesn’t matter much to  the Alberta oil producers.

They already have an alternative  project, the $5.5 billion Enbridge pipeline, which will move oil to the Pacific  Coast, where it can be shipped to the growth markets of China and East Asia.

So these capacity expansions can be carried out just as fast as the Keystone pipeline, with little or no risk of  creating a glut that can’t be readily moved to market.

The Athabasca tar sands have estimated  reserves of at least 178 billion barrels of oil, but Shell Canada estimates their capacity at 2 trillion barrels, enough to supply the United States for 250 years.

That’s why Chinese companies are interested in Canada – they have invested $15 billion in Athabasca tar sands projects over the last two years.

For an overall spread of  investments in the Canadian energy business, investors should consider the Claymore/SWM Canadian Energy  Income Index ETF (NYSEArca:ENY). This fund invests in the  34 stocks of the Sustainable Canadian Energy Income index, most of which are  not listed in New York.

It’s an easy way to invest in companies listed on the Toronto Exchange – especially if your brokerage doesn’t  deal in foreign exchanges. [Related: PetroBakken Energy (TSE:PBN), Canadian Oil Sands (TSE:COS), Crescent Point Energy (TSE:CPG), Baytex Energy (TSE:BTE)]

The index includes tar sands,  conventional oil, and uranium mining, which is another attractive sector that Canada dominates.

The ETF has a value of $114  million and an expense ratio of a moderate 0.7%. It also pays an attractive dividend yield of  2.83%.

However, the best major tar sands  player is Suncor Energy (NYSE:SU), which is currently more attractively priced than its big competitors, trading  at 10.6 times 2012 earnings and 1.44 times net asset value, with a dividend  yield of 1.3%.

Suncor just announced its fourth quarter earnings, with earnings per share (EPS) up 10% from 2010 and operating  earnings up 75%, primarily due to higher oil prices. For the year, Suncor’s  earnings of $2.74 per share were up 12% on the previous year.

Given its growth and leverage to oil prices, Suncor is very attractively valued.

So while the president seems intent on turning his back to our neighbors to the North, investors shouldn’t follow his lead.

Canadian oil sands stocks are undoubtedly one of the best opportunities on the market.

Written By Martin Hutchinson From Money Morning

Martin is a Contributing Editor to both the Money Map Report and  Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in  charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor  to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of  the Financial Services Volunteer Corps, Hutchinson became an advisor to  the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what  they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.

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