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 Jason:

“I’ve been buying American stocks,” Buffett said in an editorial in The New York Times. “This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds… If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities.”

As the world’s richest man, Buffett offers a kind of comfort that few others can.  And it couldn’t come at a better time. The fourth quarter of 2008 was the worst quarter for the Standard & Poor’s 500 Index in more than two decades, as the closely watched stock-market benchmark tumbled 23%.

It’s likely that even Buffett took the same bath as the average investor.

In separate filings with the U.S. Securities and Exchange Commission (SEC), Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK B) said it spent $9.45 billion on equity securities in the first nine months of last year, Bloomberg News reported. Among the purchases:

• Berkshire bought a majority stake in U.S. Bancorp (USB) over a period of time that never saw the bank’s share price drop below 29.09, according to Bloomberg News. That stock is currently trading at less than $15 a share.

• Berkshire increased its Ingersoll-Rand Co. (IR) stake six-fold last year when the shares never fell below $36.54. That company’s stock has lost about half its value since Buffett made those purchases.

• And Berkshire stocked up on shares of Eaton Corp. (ETN) between July and September  – a stretch in which the stock never fell below $52.32.  Eaton closed yesterday (Wednesday) at $44.36 a share.

With such ill-timed purchases, some analysts are beginning to think that “Warren” has lost his touch.

“People like to second guess Warren Buffett, but it’s not just a flip question to ask if he should have kept his powder dry a bit longer,” Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Ram Partners LP, told Bloomberg. “He’s paid dramatically higher prices than where some of them are now trading at, so you have to wonder if he was too quick on the trigger.”

But, as a long term investor who has said that his favorite time to hold a stock is “forever,” Buffett sees things differently.

“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now,” said Buffett.  “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

To support this claim, Fortune points to a long-revered Buffett metric: Total U.S. stock value versus gross national product (GNP). According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP. And right now, it does.

In late January, total stock value equated to just 75% of GNP, down from a record peak of nearly 200% in March 2000. Indeed, for most of the past decade, the ratio of stock value to GNP has ranged from 150% to 190%. That makes now an ideal time to buy. And Buffett continues to do just that.

What Warren’s Buying

In addition to taking healthy stakes in U.S. Bancorp, Ingersoll-Rand, and Eaton, Buffett also committed $4.7 billion to Constellation Energy Group Inc. (CEG), $5 billion to Goldman Sachs Group Inc. (GS), and $3 billion to General Electric Co. (GE) last fall.

Buffett has also spent the past few years stocking up on railroad stocks, especially Burlington Northern Santa Fe Corp. (BNI). Berkshire’s most recent purchase of 2.6 million shares took its stake to more than 76 million shares – in excess of 20% – of the nation’s second-largest railroad.

And last week, Berkshire threw in a few surprises.

After buying 3% of Swiss Re (OTC: SWCEY) in January 2008, Berkshire last week poured another $2.6 billion into the world’s second-largest reinsurance company. Swiss Re has lost about three-quarters of its market value since Buffett’s original investment – further evidence that the investing icon remains undaunted by his losses.

Berkshire agreed to buy $300 million of corporate debt issued by motorcycle icon Harley Davidson Inc. (HOG). The senior unsecured notes purchased by Berkshire offer a 15% annual interest payment, making it one of Buffett’s many recent fixed-income investments.

Buffett agreed to buy $300 million of debt from USG Corp. (USG) in November, and his preferred shares of Goldman Sachs offer a 10% yield. The $2.6 billion he put into Swiss Re was accompanied by a 12% yield.

“He’s got cash coming in faster than most people would have a ready place to put it,” Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares, told Bloomberg. “This economy is certainly providing him with opportunities.”

With about $30 billion in cash on hand at Berkshire Hathaway, analysts are wondering where Warren’s going to strike next.

There is some speculation that if Berkshire shares continue to slide, Buffett could order a share buyback.

In the past, Buffett has said a company must meet two conditions to warrant buybacks of its stock: “First the company has available funds – cash plus sensible borrowing capacity – beyond the near-term needs of the business and, second, finds its stock selling below its intrinsic value, conservatively calculated,” he said.

Shares of Berkshire are down 37% in the past year and there’s little doubt that Buffett has the money.

Of course, Buffett also said last month in an interview with PBS that he would notify shareholders of his intentions before engaging in a buyback program.

“If I ever name a number, I’ll name it publicly,” Buffett said. “I mean, if we ever get to the point where we’re contemplating doing it, I would make a public announcement.”

The last time Buffett made such an announcement was nine years ago.

Another possibility is that Berkshire will invest in energy companies with large holdings in oil sands – notably Calgary-based Nexen Inc. (NXY).

Buffett, along with Microsoft Corp. (MSFT) mogul Bill Gates visited the Athabasca Oil Sands region in northeastern Alberta last August.

“The world will be using more oil 15 or 20 years from now,” Buffett told the Financial Post in an interview. “We are on a course that cannot be changed. It would surprise me if the world doesn’t want to use 100 million barrels a day in 15 or 20 years.”

“You need some … elephant fields [of oil to meet looming demand] and we haven’t found any elephant fields in the last 15 or 20 years,” he added. “So the sands are huge.”

However, some analysts remain skeptical.

“Seems there is a rumor that Berkshire is interested in Nexen – no one can give me comfort that this is indeed the case – they haven’t bought into [exploration and production] names before … but stranger things have happened,” investment bank Scotia Capital wrote in a note to clients.

What Buffett will do next remains unclear, but there is one certainty: He won’t be sitting on the sidelines and hoarding cash.

“Today, people who hold cash equivalents feel comfortable. They shouldn’t,” Buffett wrote back in October. “They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value,” Buffett said in October.

“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: ‘I skate to where the puck is going to be, not to where it has been’.”

Source: Buffett Bargain Hunting Despite 2008 Losses

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?