After all, the economies in both China and India are apparently continuing to grow at a fairly rapid pace, and those countries’ demand for transportation and other forms of energy are thus likely to keep pace. For some minerals, the period of high prices from 2005 to 2008 has produced a surplus. But no such effect has been seen in the oil market, as large new discoveries are hard to find.

If we’ve learned anything in the last few years, it’s that political risk is very important in oil investments. It’s not just a question of outright nationalization – as is true in Venezuela. Other greedy countries, like Nigeria, boosted the royalties payable when oil prices were high, and have shown little willingness to reduce them again now that they have declined.

Hence, it’s once again time to look at investments in the one important energy source whose friendliness to the United States and decent quality of governance can be assured.

I’m speaking, of course, about Canada.

Canadian oil-and-gas investments are attractive for three reasons.

• Canada’s political stability makes it a buffer against turmoil from less-stable oil sources.
• The country’s conventional oil-and-gas sources add substantial capacity at reasonable prices to U.S. domestic oil production; these sources are profitable at almost any plausible oil price.
• And Canada’s tar sands in the Athabasca region represent a potential source of oil, with approximately 1.6 trillion barrels of theoretically recoverable reserves. That’s potentially larger than the Middle East, but with two major problems: The cost of production is high and the environmental impact could be substantial.

That last point – and the two major problems it identifies – is key. At low oil prices, both factors make tar sands problematic; it is politically more difficult to overcome environmentalist objections if secure oil sources do not appear a priority. However, at high prices, environmentalist problems go away, although they may add to extraction costs. However, if prices escalate rapidly, extraction costs also tend to escalate, so oil-shale-producers reaped less of a bonanza than they might have in 2007-2008.

Now that oil prices have stabilized, the cost increase has slowed, so that (for example) Suncor Energy Inc.’s (NYSE: SU) tar-sands-production costs in this year’s first quarter rose only 6% from the previous year, hitting $28 per barrel. Since oil prices are currently around $58 a barrel, that leaves plenty of profit margin.

The Canadian oil business is still rather more entrepreneurial than the international majors – Calgary is that kind of place. I remember an instance when I was working as a banker back in the 1980s. I’d spent the weekend in New York with my girlfriend, and then turned up for a scheduled Monday lunch with some oilmen at the Ranchmen’s Club. Not thinking, I’d ordered my normal urban cocktail, an Apricot Sour. This was quite rightly treated with great derision, and I was firmly presented with a bullshot (vodka and beef bouillon) – in a pint beer mug!  Got the deal, I’m proud to say, but was pretty worthless for the rest of the day.

The message: Investing in Calgary oil is a little like dining at the Ranchmen’s Club; you have to have certain qualities of fortitude and stamina!

Canadian oil companies you might look at include the following (when looking at earnings, the first quarter of 2009 is a good guide; 2008 is all over the place because of the bizarre behavior of oil prices):

Canadian Natural Resources Ltd. (NYSE: CNQ): Primarily a conventional oil producer, this company’s operations are centered on Western Canada, the North Sea and offshore West Africa (Gabon), though it is also building an oil sands plant north of Fort McMurray, Alberta. It is trading at about 14 times earnings when you strip out misguided risk management, and about 80% above book value. It’s over-leveraged, too. Conclusion: A decent company, but pricey.

EnCana Corp. (NYSE: ECA): North America’s largest natural gas producer and conventional oil producer, with operations in Western Canada, offshore Nova Scotia and the Western United States. It is a leader in oil recovery through steam-assisted natural drainage. Based on first-quarter earnings, its Price/Earnings (P/E) ratio is about 9, and its Price/Book (P/B) ratio is about 1.7. It has only moderate leverage. Conclusion: This one looks like a decent value; it even pays a semi-respectable dividend, yielding 2.8%.

Imperial Oil Ltd. (NYSE: IMO): Majority-owned by ExxonMobil Corp. (NYSE: XOM). Even though it’s now headquartered in Calgary, Imperial is the least Calgary-ish of Canada’s oil majors. It owns 25% of Syncrude Canada Ltd., the oldest tar sands project, and also explores for and produces conventional oil in Western Canada and in the offshore Atlantic provinces. Imperial also refines and markets petroleum, owning a chain of service stations and convenience stores, and produces petrochemicals. It experienced a sharp drop in first-quarter earnings, its P/E based on the lower first-quarter results is about 40, with the stock trading at four times book value. Conclusion: Overpriced.

Nexen Inc. (NYSE: NXY): The former Canadian arm of Occidental Petroleum Corp. (NYSE: OXY), it owns 7% of Syncrude and another (Long Lake) start-up tar sands project, and has oil producing operations in Yemen, the North Sea, the Gulf of Mexico, Colombia and offshore West Africa. Its P/E is about 20 based on first-quarter results and it is very over-leveraged. Conclusion: Given the non-Canada risk, not very attractive.

Suncor Energy Inc. (NYSE: SU): A major tar sands play, Suncor has now agreed to merge with Petro Canada (NYSE: PCZ), a deal that’s expected to close in the third quarter. Suncor also produces natural gas in Western Canada and operates refineries. Petro Canada has tar sands, natural gas, pipeline and retail operations. It is priced at about 30 times annualized first-quarter operating earnings, but oil prices are up about $10 since then (which should boost its earnings), and its tar sands production is ramping up. Conclusion: At 2.3 times book value, with a respectable balance sheet, it’s a decent bet on oil’s growth sector.

Talisman Energy Inc. (NYSE: TLM): The former BP Canada (NYSE ADR: BP), it was spun off in 1992, grew through acquisitions, and now has a diversified portfolio of holdings. It’s active in Western Canada, the Western United States, the United Kingdom (including a wind-farm operation), Norway, Colombia, Peru, Algeria, Tunisia, Indonesia, Malaysia, Vietnam, Australia and Qatar. It has sold $2.5 billion worth of operations to raise cash. Talisman has a P/E ratio of about 8, based on its first quarter, or 11, based on continuing operations in that quarter. It has a P/B ratio of about 1.4, and only moderate leverage. Conclusion: An iffy company in terms of quality, but cheap, and is thus worth a look.

Source: The Six Ways to Play Canada’s Oil Sector

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This from Investor’s Daily Edge:

Strange things are going on in the oil patch. They could help make Obama look good. But what’s good for Obama may ultimately give the U.S. its biggest energy headache yet.

As oil continues its dizzying fall, cheap energy and gas will allow Americans to spend more on other things. But oil companies aren’t happy and are reacting in different ways.

Some, like ExxonMobil (NYSE:XOM), are continuing their spending plans. For ExxonMobil, that would be a tidy $25-30 billion a year. Most of the other oil majors are cutting back – especially on spending in higher cost and/or non-conventional oil development initiatives.

Having just enjoyed another quarter of record or near-record breaking profits, these companies certainly have the money to spend. Oil companies may not be as vulnerable to the economic crisis and credit crunch as car manufacturers, but the good ol’ days are rapidly coming to a close.

Oil for the year is still averaging over $100 a barrel. So on the surface, oil companies are doing fine. But dig a little deeper, and some cracks begin to show. Until recently they’ve been fighting rising costs. Costs of raw materials like steel and cement have now fallen back to earth. But labor and drilling remain stubbornly high.

And production in existing fields is declining faster than expected. For example, oil is flowing from the North Sea at a clip of 1.7 million barrels per day. By 2030, it’ll drop to only 500,000 barrels. Production from existing fields in Alaska, Russia and Mexico are also suffering faster-than-expected declines.

A new report from the International Energy Agency says that oil companies will have to spend $360 billion per year just to keep this rate of decline at 6-7 percent over the next two decades. Otherwise, rates will climb over nine percent.

That’s a lot of money to spend on a losing battle. All that spending won’t reverse rates. It will just slow down falling production.

The same agency noted that oil output outside of OPEC countries has plateaued already. And it will begin to drop in a few years.

There will be individual companies in the West that will be increasing production – especially companies working the smaller oil plays. But the future for the bigger oil companies and for western oil companies as a group is grim.

With each passing quarter, their ability as a whole to maintain production levels will come under increasing pressure. Raising production is simply off the table. Ain’t gonna happen.

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It would seem that Obama’s unfriendly stance toward oil companies (like plans to tax windfall profits) is particularly backward-looking. Oil companies are in a heap of trouble. Oil companies haven’t figured out how to counteract declining prices combined with declining production.

What can they do? They could follow Royal Dutch Shell and put more money into developing non-conventional oil resources, like the vast reserves of oil sand in Canada. Shell (NYSE:RDS.A / RDS.B), along with Suncor (NYSE:SU), Petro Canada (NYSE:PCZ), Imperial Oil (AMEX:IMO) and a half-a-dozen other companies are delaying new projects or cutting back on their spending in Canada, though.

The problem? Some of these oil companies swear it’s more a concern over rising costs than the falling price of oil. But c’mon. The Canadian oil sands are a big money-maker when oil was at $145 a barrel. It would be a profitable operation even with oil at $100.

But at $65? Or $55? That’s cutting it far too close for comfort.

Here’s the kicker, though. Any increase of oil production will have to come from OPEC countries. Countries in the West – including the U.S., of course – will be more dependent than ever on OPEC to satisfy their oil thirst.

And there’s not a thing an Obama presidency can do about it.

Even if he pushes hard on energy conservation and using more alternative energy resources, it’s not going to change the fact that availability of our most important fuel will depend on OPEC countries making timely decisions on raising output.

Over the long run, moving away from oil is a good move. But there’s only one thing that will keep the price of oil down in the short run and that’s a deep and prolonged global recession. Once countries like China and India (where most of the growth in oil demand will come from) start to bounce back, the price of oil will begin a long climb up.

And given that oil companies in the meantime will be making much less money and, as a result, spending much less money on developing new production, a new round of oil shortages will develop…

That is, unless OPEC countries raise production enough to keep prices low. And that’s a non-starter if I ever saw one.

So expect oil to climb to new heights after a 2-3 year pause that has just begun. It’ll easily pass the previous high of $147 reached this July. It should hit $200 and could go higher.

The big oil companies in the West will benefit greatly, even if their production is flat-to-falling. And those big bets that companies like Suncor, Nexen (NYSE:NXY), Opti Canada (TSE:OPC), and Petro Canada have made in the Canadian oil sands will be looking a lot better.

You may want to keep in mind that among the super-majors, the company with a big lead in non-conventional oil development is Royal Dutch Shell. It’s not the best-looking super-major now. But by the time Obama is campaigning for a second term, that could well change.

Source: Can Big Oil Find Ways to Grow?