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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Strong oil exports helped to boost Canada’s trade surplus in June. The trade surplus increased to $5.4 billion (C$5.8 billion) from $4.8 billion (C$5.2 billion) in May, the national statistics office announced earlier this week. But a large part of that increase was due to higher prices, not higher volumes. Oil reached a record of $147 per barrel on July 11. Since then, oil has dropped to below $115 a barrel.

The drop in oil prices coupled with a curb in demand from consumers who are fed up with high prices at the pump have put pressure on all of the oil majors, causing share prices to fall. But Canadian oil companies have one huge advantage over both their southern rivals in the United States and European competitors.

Many Canadian oil company holdings are in stable geopolitical regions, free from threats of state seizure or terrorist attacks. Government seizing of assets in Venezuela and Russia and the volatile political unrest in areas such as the Nigerian Delta have plagued oil majors such as Exxon Mobil Corp. (XOM) and Royal Dutch Shell PLC (RDS.A, RDS.B). But Canadian oil companies that mainly operate in North America and Northern Europe are free from such hassles.

Also, companies that operate in less-developed nations are often subject to production-sharing agreements with the local governments, which can quickly eat into the oil majors’ bottom line.

Barron’s reported that Oppenheimer analyst Fadel Gheit wrote in a recent research note that “high oil prices are not good for Exxon’s business as they increase government take in royalties and taxes, strengthen national oil companies, limit access to resources, but, above all, depress the share price.”

But without the burden of similar agreements, Canadian oil companies are set to profit from any future spike in oil prices.

On the flip side, compared to other countries, many Canadian oil reserves are in tar sands or shale oil, which are harder and more costly to refine. At a certain price point, these deposits become less viable as they can cost upwards of $30 per barrel to refine into a finished product.

This would be cause for concern if oil were set to continue its recent decline. But the current pullback in oil prices is likely to be short-term and improved technology is making such reserves more affordable to extract and refine.

Over the long-term, oil will be on the rise again due to shrinking global reserves and increased demand from emerging markets. Money Morning Investment Director Keith Fitz-Gerald has a $225 per barrel price target for oil due to a variety of factors including the fact that members of the Organization of the Petroleum Exporting Countries (OPEC) have been misrepresenting their reserve capabilities for years.

Two Canadian Energy Profit Plays

With the appropriate investment time horizon, this could be the perfect time to scoop up some Canadian energy stocks at affordable prices.

Here are two to consider:

Talisman Energy Inc. (TLM) is a well-positioned Calgary-based oil and gas company with 95% of its production in the relatively stable areas of North America, the North Sea and Southeast Asia. Talisman shares are well off their 52-week high of $25.71, closing yesterday (Wednesday) at $17.34. However, the lower share price has brought this Canadian energy stock’s Price/Earnings (P/E) ratio down to a more affordable level of 10.13, with a yield of 1.09%.

Talisman is a bit of a speculative play, with so many of its assets concentrated on so-called “unconventional programs.” But late last month, Talisman boosted its 2008 capital-spending budget to $5.5 billion due to a “very promising start” to its North American unconventional natural gas programs.

“Its new push to develop unconventional natural gas and oil may be tricky, but we are optimistic Talisman is taking the right steps to unlock significant value from these assets,” Morningstar analyst Kish Patel said in a recent research report.

Petro-Canada (PCZ) is another Calgary-based oil and gas firm that has become rather affordable due to recent price pressures. But Tom Guinness, co-manager of Guinness Atkinson Global Energy (GAGEX), feels this is one oil company that will profit even if oil drops down to $100 per barrel in the short-term. Petro-Canada is trading at a P/E ratio of 5.98, with a yield of 1.69%. Shares closed at $44.39 yesterday and have traded between $40.56 and $62.78 over the past 12 months.

Petro-Canada is fully integrated with both production and refining capabilities, making it Canada’s second-largest refiner. And while the firm has had some refining problems of late, a $2 billion overhaul of its Edmonton-based plant – which will be capable of processing 135,000 barrels a day from its Alberta oil sands holdings – will soon be completed.

The drop in oil prices might hurt Petro-Canada on the production side, but should only help on the refining side as lower gas prices spur consumer demand and lead to more fill-ups at the pump.

Source: Bargain Hunting in the Canadian Energy Market