And with good reason. The United States has a bigger and more-troubled financial sector than most countries. It also has a bigger overhang from the housing bubble, has a bigger balance-of-payments deficit and has a budget deficit that’s fat enough to stall the recovery.

It would be nice to have an economic recovery to invest in that didn’t have all of these problems.

Truth be told, such an investment play does exist. What’s more, the market I have in mind is advanced enough for us to invest in it without having to go through all the rigmarole of American Depository Receipt (ADR) investing. Nor will you have to make a potentially risky foray out onto some foreign stock exchange to buy the shares, because they are almost all listed here.

The country I’m talking about is Canada. Think of it as being like home – but without the problems that our home market (the United States) currently suffers from.

Our Healthy Neighbor to the North

When the recession struck, Canada was hit by it quite badly, but for different reasons from its southern neighbor. The Canadian housing market was nowhere near as overheated as its U.S. counterpart. So Canada’s housing downturn wasn’t as deep.

And what about the banking systems? To be sure, Canadian banks received a bailout, but it was less than $20 billion in total. Compare that to the veritable alphabet soup of U.S. bailout programs ranging from “TARP” and “TALF” that have injected more than $2 trillion into the U.S. financial system.

On the other hand, natural resources prices crashed last autumn, which had a major effect on Canada’s resource-based economy. A number of large projects in the Athabasca Tar Sands region were cancelled, for example – since this region has oil reserves around the size of the entire Middle East, its development is crucial to Canada’s future.

The “loonie,” Canada’s currency, declined from around “parity” to the U.S. dollar to an exchange ratio of C$1.30=$1 U.S. In effect, this was a “flight to safety” into the dollar and U.S. Treasuries. And it affected Canada as it did other countries.

In 2009, however, Canada and the United States have traveled down totally different paths. Canada did very little “stimulus,” so its state budget is in much better shape. The deficit for the 2009-2010 fiscal year $53 billion (C$56 billion) is only about 4% of gross domestic product (GDP). For the 2010-2011 fiscal year, the deficit is expected to be about $42 billion (C$45 billion), or 3.2% of GDP.

Energy Powers the Rally

The bounce in natural resources prices has really helped power up the rebound of Canada’s market.

Investment in the tar-sands region has picked up again, with a big merger between the two largest tar-sands-extraction companies: Suncor Energy Inc. (NYSE: SU) and Petro-Canada. The rising gold price hasn’t hurt either – mines are appearing all over the place! All this new activity has made the loonie bounce, so it’s back to about C$1.07=$1. While interest rates are as low as the United States, the Bank of Canada hasn’t done much “quantitative easing,” meaning that inflation isn’t too much of a worry.

The strong loonie helps here, too.

Canada seems to be recovering nicely. Its index of leading indicators jumped 1.1% in August, while manufacturing sales grew 5.5% in July. The country presently runs a modest current account deficit, but it’s only 2% of GDP. That’s much lower than even the current U.S. deficit, let alone that of 2007. It had a little more public debt than the United States in 2008, but given current U.S. deficits, those two lines almost certainly have crossed by now.

There are two caveats. The first is an obvious one: If commodity prices crash to earth, Canada will have some difficulty because commodities are a large part of its economy. Personally, I don’t see that happening. It’s notable that PetroChina Co. Ltd. (NYSE ADR: PTR) has just invested $1.7 billion in a Canadian tar sands project, so China must not think so, either.

The other risk is political. The current minority Conservative government of Stephen Harper has done a good job, but the opposition Liberals have withdrawn their parliamentary support. That means there may be an election this autumn. A Liberal majority government would be no disaster. They might be a bit sticky about oil-drilling permits, but would not otherwise rock the boat.

However, a Liberal coalition with the leftist New Democrats could push public spending and the deficit up, and there’s no guarantee against that. (One of the problems with multi-party systems like Canada’s is there is an almost infinite variety of possible governments after each election, some of which can be fairly alarming from a business perspective.)

However, Canadian elections are a much smaller risk than you get in most countries, and the commodity/oil price crash, if it happened, would help the U.S. economy and, presumably, your U.S. portfolio. So it’s worth having some Canadian exposure, perhaps with the Canadian market exchange traded fund (ETF) iShare MSCI Canada Index (NYSE: EWC).

For years it was almost fashionable to dismiss Canada from an economic standpoint. Now, however, that may well be where the smart money would like to go. As an economy, Canada is competent and stable.

It’s the kind of country that looks to be a good place for some of our money.

The Waxman-Markey Bill, the much-ballyhooed clean energy legislation passed recently by the U.S. House of Representatives, is an economic and political mess.

It introduces huge new distortions in markets, imposes onerous new regulations on a number of industries, requires a large addition to bureaucracy and risks a trade war.

And it does very little to fight global warming.

At this point, however, investors really only need to know two key things about this legislation in order to set themselves up for profit, while avoiding any losses from the bill’s fallout:

• From a political standpoint, Waxman-Markey is likely to become law in something close to its current form, meaning investors can craft a plan of attack with a fairly high degree of confidence.
• And, from an economic standpoint, it seems to define a pretty clear set of winners and losers, enabling us to flesh out that plan.

A “Good” Tax?

I’m not sure whether I believe in global warming. We clearly seem to be producing more carbon dioxide than we used to, but it’s not clear how much of an effect that’s having on global climate. Equally, the effects of extra carbon dioxide are long-term and largely irreversible, so even if the warming effect is limited in our lifetime, we probably owe it to our grandchildren not to leave them living in a steam bath.

To the economically minded who share my skeptical-but-cautious view, the optimal policy is pretty obvious: We should enact a carbon tax. Government operations have to be funded somehow, and there’s no obvious reason why a carbon tax should be any more economically damaging than any other kind of tax.

A carbon tax has two advantages over other alternatives:

• First, it can be varied easily, as we get new information and become more worried or less worried about global warming.
• Second, it allows investment and purchase decisions to be made by the market, just tweaking the price mechanism a bit to reflect our concerns about carbon emissions.

We’re not going to get a carbon tax, because it has the politically deadly word “tax” as part of its name. Still, during the presidential campaign, then-candidate Barack Obama showed off a pretty sensible “cap-and-trade” program. All the carbon emissions permits were sold, so the market was able to work properly, with no freebie giveaways to politically favored recipients. Further, there were no  “offsets” by which companies could satisfy domestic permits by persuading the Chinese not to build a dirty coal-fired station, for example (these have given rise to innumerable scams in the European Union cap-and-trade system).

Such a system would have raised lots of revenue, helping to close the budget deficit and pay for healthcare reform, which ought to be one of its major objectives, given the United States’ now-dire fiscal position.

The Lowdown on Waxman-Markey

That’s not what we’re getting with Waxman-Markey, under which 85% of the emissions permits will be given away for free. That depresses the amount of carbon emissions saved, because with so many free permits available, the price of permits will be low.

Also, Waxman-Markey forces new buildings to use 30% less energy by 2012, intruding the U.S. federal government into yet another business previously regulated at the state level. It allows “offsets” for 2 billion tons of carbon emissions a year – 50% domestic and 50% international.

Finally, it doesn’t even raise any net revenue, because the giveaways and administration costs match the fairly paltry revenue raised through selling permits; according to the Congressional Budget Office (CBO) it’s just barely “revenue neutral” in the 2010-2019 time frame. That’s a major problem for President Barack Obama’s budget, which had assumed $624 billion in revenue from cap-and-trade in that same period.

The Winners and Losers

Needless to say, with the government rearranging deckchairs and giving out goodies in such a big way, there will be winners and losers. Clearly that’s what investors most need to understand.

One winning category will be distribution-oriented public utilities – the guys who actually send out electricity bills, including Consolidated Edison Inc. (NYSE: ED), Pepco Holdings Inc. (NYSE: POM) andNortheast Utilities System (NYSE: NU).

These companies will be given permits for 35% of the total “cap” amount in the early years, with instructions to provide rebates on electricity prices. Some of the value of those free permits is bound to flow through to shareholders. In fact, the bill was passed on a Friday, and it was notable that on the following Monday that the distribution-oriented utilities showed a nice bounce. If you can get a 7% dividend yield from the company that sends you electricity bills, it’s probably a buy!

Clean-coal technologies (primarily carbon capture and storage) are due to get 5% of the emission permits over a lengthy period. Most of the companies experimenting in this area are privately held, but Duke Energy Corp. (NYSE: DUK) is planning a carbon-sequestering power station in Indiana, so may be a beneficiary here – as well as through its operation as a major power distributor.

Another group of winners will the sharper (most-creative) operators in the financial-services arena. Since emissions permits will trade, somebody will have to trade them. What’s more, there will quickly arise the whole paraphernalia of futures, options, swaptions, and default swaps. Bear Stearns and Lehman Brothers are, alas, no longer with us, but Goldman Sachs Group Inc. (NYSE: GS), as always, will be prominent at the front of the queue!

Losers? Well, all of us who will pay more for power, but also the Canadian oil sands companies, such as Suncor Energy Inc. (NYSE:SU), who seem fated to pay a hefty premium for their carbon-expensive operations. Probably, the major petrochemical companies such as The Dow Chemical Co. (NYSE: DOW) will be losers, too, as will other carbon-intensive industries. Housing companies will be losers – they use quite a lot of carbon-emitting materials, and will be forced to adopt expensive energy-saving technologies, making their products less affordable.

Of course, all this analysis depends on whatever changes the U.S. Senate may make to the legislation. And that chapter has yet to be written.

Five Ways to Profit From the New Waxman-Markey Clean Energy Bill ]]> http://www.contrarianprofits.com/articles/five-ways-to-profit-from-the-new-waxman-markey-clean-energy-bill/18856/feed 0 http://www.contrarianprofits.com/articles/take-advantage-from-the-refining-industry-fallout/17515 http://www.contrarianprofits.com/articles/take-advantage-from-the-refining-industry-fallout/17515#comments Wed, 03 Jun 2009 22:12:17 +0000 Andrew Snyder http://www.contrarianprofits.com/?p=17515 The nation’s refining industry is taking a nosedive today thanks to a report from Valero. The markets are reacting like all refiners are going down in flames. It is not the case by any means. Take advantage of the mistake.

It is not every day we see a $10 billion company like Valero Energy (NYSE:VLO) shed 20% of its value. When it happens, it is certainly action worth investigating.

The sudden decline comes thanks to the company’s executives estimating a fifty-cent per share Q2 loss, versus $0.59 per share earlier estimates and $0.74 per share consensus projections. The jaw-dropping news sent shares of competing refiners into the dumpster as well.

Frontier Oil (NYSE:FTO) is down over 15%. CVR Energy (NYSE:CVI) is down over…

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

[Editor's Note: When it comes to banking or global economics, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson - a former investment banker with more than a 25 years experience. Hutchinson has proven himself to be a market maven and he is currently offering investors an opportunity to make $4.201 in cash in just 12 days. You can also subscribe to Martin's new investment service, The Permanent Wealth Investor, byclicking here .]

UTS Energy shareholders have rejected the C$1.75 cash per share offer tabled by Total E&P Canada. As a result, Total has terminated the offer. UTS ended the session down C$0.06 at C$1.52.

Petro-Canada (NYSE:PCZ), which is in the midst of merger with Suncor (NYSE:SU), reported a first quarter loss of $47 million or $0.10 per share. Petro-Canada ended the day up C$0.07 at C$37.65.

NovaGold Resources (AMEX:NG) tabled a feasibility study for its 50 percent owned Donlin Creek project in Alaska. The study envisions a 53,500 tonne per day operation producing 1.6 million ounces of gold at a cash cost of $394 per ounce over the first five years of a 21 year mine life. At $900 per ounce for gold, the net present value at a 5 per cent discount rate is $1.5-billion with an internal rate of return of 9.4 per cent. NovaGold ended the day up C$0.05 at C$3.29.

Timminco managed to tack on C$0.19 to close at C$1.77 after the solar silicon supplier inked a financing deal with its controlling shareholder, AMG Advanced Metallurgical Group N.V. Under the proposal, AMG will purchase about 7.4 million common shares at a price of C$2.02 per share for a cool C$15 million.

Western Canadian Coal announced that it has secured enough sales contracts for the fiscal year ending March 31, 2010 to continue mining operations at the Wolverine operation and Brule mine in British Columbia. Western added C$0.18 to close at C$0.96.

Romarco Minerals failed to get a lift despite hitting more goodies at its Haile mine project in South Carolina. The latest included 5.1 grams gold per tonne over 54.9 metres. Romarco ended the session down C$0.02 at C$0.53.

The junior board failed to stay above the 1,000 point resistance mark and with the summer doldrums fast approaching trading volumes should start declining. We shall see what Wednesday trading has in store.

Source: Resource Stock Roundup: Wednesday, April 29th, 2009

Potash Corporation of Saskatchewan (NYSE:POT) tabled first quarter earnings of $308.3 million or $1.02 per share down from the $566 million or $1.74 per share tallied in the first quarter of 2008. Prices for potash actually rose during the quarter but demand fell by 86 per cent. Potash ended the day down C$2.91 at C$97.49.

Suncor Energy (NYSE:SU) reported a first quarter loss of C$189 million or C$0.20 per share with output hitting 278,000 barrels per day during the first three months of the year. The second-largest oil sands producer, which is in the midst of a merger with Petro Canada (NYSE:PCZ), added C$0.86 on the day to close at C$30.33.

Fortress Minerals came out with an inferred resource of 5.975 million tonnes grading 2.43 grams gold per tonne at its Amy prospect on the Svetloye gold project in the Russian Far East. Fortress ended the day up C$0.075 at C$0.315.

Upstart gold miner Avion Resources produced 6,211 ounces of gold during the six weeks since beginning production in Mali. The cash cost per ounce of gold for the year is currently projected to be $505 per ounce. Avion ended the session up C$0.005 at C$0.30.

Shares of Chariot Resources added C$0.005 to close at C$0.295 after the company reported a positive feasibility study for the Mina Justa project located on its 70-per-cent-owned Marcona copper property in Peru. Using $2 per pound for copper, the pretax net present value comes in at $616.2 million at a discount rate of 8 per cent. The internal rate of return is 19.9 per cent and the cash operating cost over the life of the mine is $0.885 per pound of payable copper.

A stock to watch is beaten-down nickel player Belvedere Resources. Shares in the company were halted pending news at C$0.12.

The market is defying all the economic data and without verification that the earnings picture will improve, a selloff is in the cards at some point. We shall see what Friday trading has in store.

Source: Resource Stock Roundup: Friday, April 24th, 2009

More importantly for the future of both companies, the combined portfolio boasts the largest oil-sands resource position, a vital but difficult source to mine.

“It’s a good opportunity for Suncor to snap up some good assets at fairly depressed prices,” Greg Smith, managing director of London-based investment adviser Fat Prophets U.K. Ltd., told Bloomberg. “Oil sands are the legitimate solution to the long-term energy problem but it’s a lot more costly to get the oil out of the ground.”

The merged company will also feature:

• A resource base with approximately 7.5 billion barrels of oil equivalent (boe) of proved (developed and undeveloped) and probable reserves, on top of an estimated contingent resource base of approximately 19 billion boe.
• A Strong cash flow from current crude oil and natural gas production of approximately 680,000 boe per day.
• A position in every major oil development project on Canada’s East Coast.
• Low-cost international crude oil and natural gas production from the North Sea, North Africa and Latin America.
• A strong Canadian retail brand.

Also, Suncor expects the merger to save $1.3 billion through the elimination of redundant spending and by targeting capital budgets on high-return, near-term projects.

“This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally,” Rick George, President and Chief Executive Officer of Suncor, said in a news release. “The combined portfolio boasts the largest oil sands resource position, a strong Canadian downstream brand, solid conventional exploration and production assets, and low-cost production from Canada’s east coast and internationally.”

Ron Brenneman, Petro-Canada’s president and chief executive officer, said the merger reduces capital requirements, increases operating efficiencies and integrates already complimentary company operations.

“The increased scale provides more stability in volatile markets, plus the financial and organizational capability to successfully take on large-scale projects in the future,” said Brenneman, who will take the role of executive vice chairman in the merged company.

The all-share deal values Petro-Canada shares at a 25% premium, and gives Petro-Canada shareholders 1.28 common shares of Suncor for every share they own. Shareholders of both companies have to approve the merger, and both companies expect the merger will be completed in the third quarter.

Source: Suncor Buying Petro-Canada for $15 Billion, Consolidating Canadian Energy Industry

This from Money Mornings Peter Krauth:

There’s an epic confrontation brewing inside the new administration of U.S. President Barack Obama. And it has nothing to do with the controversial economic stimulus package, or the new banking-bailout blueprint that U.S. Treasury Secretary Timothy F. Geithner is expected to unveil today (Tuesday).

This “other” confrontation has to do with energy. And the two sides are very clearly delineated.

On the left is renewable energy. On the right: Secure access to oil.

Upping the ante in this already monumental debate is the huge decline in the stock and commodities markets – a skid that’s firmly etched in investors’ minds. Here’s why.

Anyone who followed the Obama campaign remembers his pledges to ensure forceful action aimed at reducing greenhouse gas emissions by raising energy efficiency, increasing the use of “greener” energy sources, and rolling out emissions standards that would apply across the nation.

And only a couple of weeks ago, as we sat fixated on his inaugural speech, the new president reminded us of the need to harness the power of wind and sun to safeguard the environment.

But he also unmistakably reaffirmed the importance of energy security to America.

So, in building his cabinet, President Obama has positioned some heavyweights to back up his words, on both sides of the debate.

The Dilemma

How will these seasoned veterans, as they set out to accomplish their own objectives, reshape the future of energy policy?

Well, one sure bet is to expect a regular stream of abundant pressure from the environmentalists. They will be eager to legislate new standards for greenhouse gas emissions, and they’ll appeal to the president’s stated goals of shifting energy use toward environmentally friendlier technologies.

But achieving a “greener environment” brings new costs, such as cap-and-trade schemes, carbon taxes and maybe even new gasoline taxes.

Yet right now, America is contending with the rawest of nerve endings in the form of a highly frail economy that is “teetering on the brink” of an even deeper downturn than we’re already ensconced in, thanks to escalating job losses and a massive credit drought.

So it’s naïve to think these factors won’t influence policy, at least in the near-to-medium term.

And, to add to the mix, we have to factor in a vital American concern: The U.S. economy would seize up like the Tin Woodsman in a monsoon without the continued supply of foreign oil.

The Team

Defending the “environmental camp” are Carol Browner, Lisa Jackson and Stephen Chu.

Browner, the former Environmental Protection Agency (EPA) administrator, is now adviser for energy and climate change.  Jackson, who spent 15 years with the EPA and most recently served as New Jersey’s environmental protection commissioner, will replace Browner as the new EPA administrator. And Chu, a Nobel Prize-winning physicist and vocal advocate of national-emissions caps, is now the U.S. energy secretary.

In the “secure energy” camp are Gen. James L. Jones and Hillary R. Clinton.

Gen. Jones is Obama’s new national security advisor. He is retired from the U.S. Marine Corps and was once the NATO supreme commander. Those who know him say he’s well respected (read tough) and fair, with the ability to assess a variety of options, no matter their source.

Probably the most prominent face on the team is that of Clinton, the new secretary of state. As most of us know, Clinton is an experienced politician, and is likely to wield considerable influence that we shouldn’t underestimate.

What’s Next?

So who will win out? And more importantly, how should you position your portfolio to benefit?
Obama will work hard to seek common ground. But I expect that the pressures of an economy on life support will prevail over the next 12-18 months.

Of the $850 billion stimulus package, a good portion is sure to find its way into green energy, but will only get spent by late 2010.  In the meantime, it will be too risky to cripple the economy further with additional tax burdens and higher costs.

In that case, you can look for the new president to enact legislation that is beneficial to the environment, but will only take effect within about two years.

That gives the economy a reprieve, and also allows the demand and price of oil to climb back toward the $70 to $80 a barrel, a level that would allow costlier oil production to turn a reasonable profit.

From an investment standpoint, then, a higher price, and a secure source of oil from U.S. neighbors, means the Canadian oil sands, natural gas, and conventional oil producers should be on your radar, experts agree.

What The Players Are Saying

Both Gen. Jones and Secretary of State Clinton recognize Canada as a stable and abundant source of oil.  That’s logical in my view, as Canada’s oil reserves are second only to those of Saudi Arabia.

[Editor's Note: By the way - and this is a point that both Money Morning Investment Director Keith Fitz-Gerald and investing icon Jim Rogers have repeatedly made - no independent source has been allowed to verify the Saudi numbers.]

And as it turns out, Gen. Jones is a staunch supporter of Canada and its oil sands.

As chairman of the Institute for 21st Century Energy, Gen. Jones has delivered a number of defining speeches in which he highlighted energy security as a top priority for America’s safety.

And the Institute supports both Canada and Mexico as strategic sources of oil as America tries to wean itself from the oil of “less stable” nations.  What’s more, 21st Century cautions that imposing costly climate change legislation could cause the already foundering U.S. economy to fail.

So while Canada and the United States have longed enjoyed a rather close relationship (usually friendly, though at times antagonistic), I do expect it will become more intense.  Scores of issues, including NATO, the Northwest Passage, harmonized emissions standards, and energy security will take center stage.
None of this has been lost on the new secretary of state either.

In her senate confirmation hearing, Secretary of State Clinton thought it vital to mention that “in our efforts to return to economic growth here in the United States, we have an especially critical need to work more closely with Canada, our largest trading partner, and Mexico, our third-largest. Canada and Mexico are also our biggest suppliers of imported energy.”

And just running my quick Google search also reveals that, according to the Energy Information Administration, Canada (in top spot) supplies nearly 50% more oil to the United States than does Saudi Arabia (in 2nd spot).  And Mexico’s (3rd spot) level of oil exports to the United States are shrinking, as its main oil field, the Cantarell Complex, has peaked, and now depletes around 15% per year.

Facts are facts, and President Obama knows that a healthy U.S. economy needs Canada’s secure oil.  Investing in alternative energies is the right action to take, but the costs are high, and the output and payoff are years away.

Early this year, President Obama will go to Canada on his first official foreign visit.  And Canadian Prime Minister Stephen J. Harper is likely to remind the new president of an important statistic:  Alberta’s oil sands already export 500,000 barrels of secure oil to the United States every day.

How To Play This Trend for Maximum Output

Two of the biggest names in Canadian oil should benefit as this scenario plays out. They are Suncor Energy Inc. (SU) and EnCana Corp. (ECA).

Suncor is an integrated energy company, and one of the largest oil sands companies around.  This is no junior explorer.  It produces 220,000 barrels of oil equivalent per day (BOE/D).  And the company is currently tremendously undervalued.

They have ambitious plans to expand as well, to 550,000 (BOE/D) by 2012. Current oil prices would not justify the investment, but that’s if you think oil’s staying at $40, which I don’t.  Refining and marketing are also significant to Suncor’s business.  The company’s 160,000 (BOE/D) refining capacity provides a higher value with respect to its oil sands assets.

Downstream, Suncor also owns 300 Sunoco gas stations in Canada, 44 Phillips stations in Colorado, and offers diesel fuel to corporate clients directly from its Canadian terminals.  All of this ensures direct access to customers for the company’s end products, which protects cash flow under tight credit conditions.

In order to process all that tar sand into oil, Suncor needs plenty of natural gas.  And it’s established a significant collection of natural gas projects that are able to amply supply its internal production, while generating excess to sell into the market. This internal natural gas asset bodes well for the company’s self-reliance, as well as its investment attractiveness.

And interestingly enough, Suncor has forayed into alternative energies, as well.  The company has four wind farms in Ontario, Alberta and Saskatchewan, and runs the largest ethanol facility north of the U.S. border.

Both of these “green” energy projects help provide two vital benefits:

• Diversification.
• And carbon credits.

Should a cap-and-trade scheme eventually be implemented, these credits would help offset current production emissions.

Suncor needs $49 a barrel oil to break even. So unless you think that we’re going to remain at or below that level for an extended period, you’ll want to own this company for the long term.

The aforementioned EnCana is another leading oil-and gas-producer in North America, with 100% of its production and reserves on this continent. Natural gas production is in the neighborhood of 2.2 billion cubic feet per day, and oil and natural gas liquids are about 120,000 barrels per day, with about 50,000 of that from oil sands.

Together with ConocoPhillips (COP), EnCana has formed an integrated North American heavy oil business.  EnCana’s contributions to this 50/50 venture are two oil sands projects with 6.5 billion barrels of recoverable resources. Conoco’s contributions are Illinois and Texas based refineries with heavy oil processing facilities.

About 80% of EnCana’s current production is in natural gas, which is interesting for two reasons:

• First, natural gas was recently trading at roughly $4.50 per thousand cubic feet (Mcf), yet the company has hedged its production through October ‘09 at $9.15 Mcf, allowing for considerable profit protection.
• Secondly, natural gas is likely to be favored by the new Obama administration – especially for power generation, since it burns much more cleanly than coal.

For the investor seeking an energy play, EnCana is also a more conservative pick than Suncor, due to its higher relative natural gas revenue, its venture with ConocoPhillips, and more diversified sources of income.

And recently, Innovest Strategic Value Advisors (a New York based research firm) included EnCana in its Top 100 list of most sustainable large companies in the world, citing EnCana’s above-average investments in renewable energy.

Yes, it’s true that oil sands production brings about higher greenhouse-gas emissions.  But oil-sands producers are aware of this.  The province of Alberta will spend $2 billion to develop new methodologies to sequester large amounts of carbon dioxide underground to negate these unwanted effects.

So when you boil things down, Canada is far and away the largest, nearest, most reliable source of friendly oil for the United States.  And until the U.S. economy recovers during the next year or more, transforming “green” energy into “affordable” energy will remain more of a challenge than a reality.

Source: Two Ways to Profit From the Obama Administration’s Energy Dilemma

This from Money Morning:

Between September 2007 and June 2008, oil prices doubled, gold rose 30% and commodities, in general, advanced by a similar percentage.

So why, six months later, when prices have fallen back below last year’s levels, does everybody think they won’t rise again? The difficulties of extraction haven’t gone away, nor have the prospects of increasing consumption in the faster-growing emerging markets such as China. Yes, the prices of commodities are severely affected by marginal moves in supply and demand, but this is ridiculous!

Rest assured, commodities prices will rebound in the New Year. The reasons will soon become quite clear.

The decline in commodities prices since the summer is broad-based. The Reuters Continuous Commodities Index traded recently at 341, down 25% from a year earlier and off about 45% from its June high. At $48 a barrel, oil is trading at less than one-third of its June high. And gold, which appreciated less than other commodities in the spring, is still down 18% from the $1,000-per-ounce level it reached earlier this year.

Conventional wisdom blames the decline in commodity prices squarely on the global recession. Since the rise in demand from emerging markets – particularly the huge consumption bases of China and India – had caused the previous run-up, it seems natural that the absence of that demand growth would cause prices to decline. After all, that happened in 1982, when a deep recession in the United States spread to a number of other countries. Oil prices plunged from $40 a barrel to a mere $10, breaking the back of the Organization of the Petroleum Exporting Countries (OPEC) in the process.

This time around, however, the math doesn’t seem to work. For one thing, the world as a whole is by no means locked into recession. We in the rich countries think of our economies as spiraling into a deep decline, but the reality is that we may only be witnessing a secular shift caused by the narrowing of income differentials between rich and poor countries as globalization proceeds.

In countries such as China, India and Brazil – three of the four so-called “BRIC” economies – growth has slowed and many are suffering imbalances in their financial structures, but there is little sign of actual decline in any of them. Indeed, if China’s recently announced $590 billion infrastructure investment serves to redirect growth toward domestic consumers, it is possible that the demand for oil and other commodities there may show very little dip at all; it takes a great deal of iron ore and other commodities to produce $100 billion worth of railroads, for example, one of China’s stated objectives.

On the supply side, OPEC was full of spare capacity in the 1980s. South Africa and the Soviet Union were still expanding gold production, and the explorations of the 1970s had produced surpluses of many other commodities. But in the past two and a half decades, things have changed.

Oil, for example, remains in short supply. Both deep offshore fields – like those discovered by Petroleo Brasileiro SA, or Petrobras (ADR: PBR), in the Tupi Complex – and the tar sands (like the ones in Canada and Venezuela), are economically unfeasible with oil trading at such a low price. And, if prices remain low, the expansion and exploration of new sources of production will be curtailed even further.

More importantly, though, supply and demand is only one of the reasons commodity prices rise and fall. What really spurred the big price rise in commodities that took place earlier this year was the explosion in the money supply throughout the world.

Money supply, unlike demand, is something that hasn’t evaporated with the economic downturn. In fact, it has actually ramped up. Even though money markets have become illiquid, central banks throughout the world are forcing down interest rates and pumping out liquidity by every means they can think of [Indeed, the policymaking arm of the U.S. Federal Reserve meets today (Tuesday), and is expected to cut rates yet again. For a related story, click here].

Meanwhile, governments everywhere (except Germany) are implementing massive “stimulus packages” that will destabilize budgets and insert huge additional demand into the global economy. Since the governments will have to borrow the money to finance those stimulus packages – and the budget deficits that are inevitable in an economic downturn – central banks will be compelled to pump out even more money to accommodate all the increased debt; otherwise, interest rates would go through the roof and finance for the private sector would become unobtainable, hardly the object of this whole costly exercise.

The future is thus one of rapidly increasing inflation, combined with a healthy recovery in global demand, at least in the emerging markets, as Europe and the United States may suffer deep recessions this time around.

To take advantage of this likely trend, I would recommend a broad portfolio of shares whose prices are closely linked to the prices of major commodities. Among those you might consider:

• Vale (ADR:RIO): As a gigantic Brazilian iron ore producer, Vale will benefit enormously from China’s new infrastructure program (Think of all those steel rails!). The stock is currently trading at just over $12 a share with a Price/Earnings ratio (P/E) of about 7.0 and a yield of slightly more than 1.0%.

• Rio Tinto PLC (ADR:RTP): Another huge mining conglomerate, the long-and-bloody attempted takeover of Rio Tinto by BHP-Billiton Ltd. (ADR: BHP) recently fell apart. At $93, Rio Tinto shares have a yield of 5.8% and a prospective P/E of about 3.0. The company is overleveraged, so somewhat dangerous, but you’d be getting paid for the risk.

• Suncor Energy Inc. (NYSE:SU): The largest pure player in the Canada’s Athabasca tar sands, Suncor’s marginal cost of production from operating facilities is about $30 per barrel and the cost of opening new facilities is about $60 per barrel. It’s currently trading with a P/E of 8.0 but has a yield of less than 1.0%, as it needs all its cash.

• SPDR Gold Trust (NYSE:GLD)exchange-traded fund (ETF): The largest ETF that invests in gold, GLD has more than 750 tons of the “yellow metal” held in trust.

Yanzhou Coal Mining Co. (ADR:YZC): China’s largest coal miner, Yanzhou has a P/E of 4.0, yields 3.5% and enjoys low costs – not to mention a super-close proximity to the gigantic market that is China.

Source: Five Ways to Profit from the New Year Rebound in Commodity Prices

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?