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5 stocks for your tax refund
Try splurging on your future. Pricey oil has changed the energy landscape, making these companies that stretch our fossil fuels into tempting long-term picks.
By Jim Jubak
So you've filed your tax return, and after wrestling with all those forms and schedules, you've figured out that you're entitled to a refund. So what are you going to do with it?
Spending it is always an attractive option. It's easy to feel you're entitled to splurge simply for getting through all the paperwork.
But I like to treat any refund I get as found money. Before I can even think about how to spend it, I stuff it into a stock or some other investment. In recent years, I've been stashing my refunds away in my kids' college funds or putting it aside for their retirement. (It seems like the least I can do for my kids if my generation is going to spend all the Social Security surplus now on the books.) Whatever the specific purpose, it's clear that I'm socking away this refund for 10 years or longer.
The longer I dither about where to invest this found money, I've discovered, the more likely it is to be spent. So I try to go into tax season with a short list of five stocks to buy with my tax refund. So here's this year's list:- Enbridge (ENB, news, msgs)
- Canadian Natural Resource (CNQ, news, msgs)
- Peabody Energy (BTU, news, msgs)
- Repsol (REP, news, msgs)
- TransCanada (TRP, news, msgs)
Why these five stocks for your tax refund? To my mind, if you're a long-term investor right now, energy is the sector you want to own, and these five stocks represent the future of energy over the next decade. Buy them now and you'll need a bit of patience since you'll be ahead of the herd, but they should pay off with market-beating performance over the next 10 years.
The future of energy -- at least the future for the next 10 years -- doesn't belong to any of the whiz-bang technologies such as fuel cells, or with any of the green technologies such as wind power, or with the resurrection of nuclear power. It could. But the political will to push these technologies to market just isn't there in Washington. I fear that we'll spend the next decade watching oil and gas prices rise, and proven reserves gradually shrink, until the pain of higher energy prices finally energizes the kind of crash program -- a war on high energy prices -- that politicians love.
So, the next decade is likely to look at lot like the last one. Except that oil prices above $40 a barrel will finance the development of energy resources that weren't viable when oil sold for $20 a barrel. Over the next decade, the future of energy supply is with these follow-on technologies that extend current supplies of oil and natural gas and coal and that transport them from areas of plentiful supply to areas of scarce supply.
I'd break down the themes of the next decade's future of energy into four parts.
Canadian oil sands
I can't say it captured many investors' attention when a couple of years back the U.S. Department of Energy moved Canada into the No. 2 slot in its ranking of top global oil reserves (only Saudi Arabia ranks higher) on the strength of the country's huge deposits of oil sands. Forecasts now show Canada's production from oil sands outpacing its production from conventional oil wells sometime in the next few years.
But it sure should have shown up on their radar screens when China's CNOOC (CEO, news, msgs) bought a 17% stake in Canadian oil sands producer MEG Energy this week for $120 million (U.S.).
Oil sands are a mix of sand with a tarlike, ultra-heavy grade of crude oil called bitumen. You extract oil from oil sands by injecting steam into the sand to turn the bitumen into a liquid that can then be pumped to the surface.
Related news and commentary on MSN Money
Turning bitumen into oil is an energy-expensive process that burns a lot of natural gas to produce the steam used to liquefy the bitumen. That was a problem when oil sold for $15 or $20 a barrel, since the costs of producing a barrel of oil from oil sands is currently around $20 a barrel.
At $50 or even $40 a barrel, the cost problem vanishes.
Canadian Natural Resources, Canada's second-largest producer of natural gas, has sunk a good 40 years into developing oil sands technologies and deposits while waiting for the price of oil to climb high enough to make large-scale production profitable. All the risk here is financial since Canadian Natural knows exactly where the oil is. But that risk is considerable. The company's Horizon Oil Sands Project is expected to cost $8 billion. Production should start in 2008 and the project should reach full production of 230,000 barrels a day in 2012. With estimated reserves of 6 billion barrels, Horizon could pump at that level for more than 40 years.
With a debt-to-equity ratio of 48%, or 3% below the oil industry average, and with the company set to produce an estimated $14 a share of free cash flow in 2005, Canadian Natural shouldn't have any trouble raising the capital it needs for this project. All it needs is for oil to stay above $35 a barrel. I think that's as close to a done deal as you'll ever find in investing.
Canadian natural gas transporters
The natural gas to turn bitumen into oil and the natural gas to generate electricity, heat homes and produce chemicals will all increasingly come from Canada over the next decade as the mature fields in the U.S. continue their current production declines. That's good news for TransCanada and Enbridge, since they own the pipelines that move gas and oil from production fields to U.S. consumers.
More than half the gas produced in western Canada moves to market through a TransCanada pipeline, and the company's entire system adds up to 25,000 miles of pipeline. Enbridge is smaller, owning about 8,500 miles of pipeline. But both companies have the kind of scale that lets big pipeline companies get bigger by swallowing up smaller systems owned either by competitors or by big integrated oil companies looking to get out of the pipeline business. Recently, for example, Enbridge was able to expand into piping gas from fields in the Gulf of Mexico by buying a pipeline system from Shell U.S. Gas and Power. TransCanada recently pushed further into the U.S. market by purchasing systems on the U.S. West Coast that link up with its Canadian systems.
The global demand for scarce natural gas puts the pipeline companies in a key role as middlemen now and in the future when supplies continue to tighten. For example, TransCanada will take part in new pipelines to run from the Mackenzie Delta in northern Canada and Alaska to the United States. The lines will hook up with existing TransCanada systems and give the company new volumes of natural gas. When those new supplies come online in the next decade, they will fuel revenue growth and, for patient long-term investors, higher stock prices.
Liquefied natural gas
But pipelines won't be enough. There's a terrible mismatch between where natural gas is consumed and where the new supplies are located. The solution to that is to liquefy the gas by cooling it at the production end, pump it onto tankers, and then, at the consuming end, turn the liquid back into gas that can be sent through pipelines.
TransCanada is among the companies working to build liquefied natural gas (LNG) terminals in parts of the United States, despite opposition by residents near the proposed plants who fear they are a natural target for a terrorist attack. A panel of the House Energy and Commerce Committee has voted to give the federal government the power to overrule states that might hold up the siting of a liquefied natural gas plant. The provision, if it makes its way into the energy bill now before all of Congress, stands a good chance of becoming law.
But TransCanada and the United States are latecomers to the LNG party compared to Spanish energy company Repsol, the fifth-largest energy company in Europe. To move gas from Africa to its markets in Europe, Repsol, which is the ninth-largest producer of natural gas in the world, runs pipelines under the Mediterranean and operates LNG plants on both the African and European shores of that sea. Repsol is one of the top three transporters of LNG in the Atlantic basin, and the company has set its sites on the U.S. market. With reserves and operations in Trinidad and Tobago, Repsol has island stepping-stones for bringing LNG to the U.S. The market potential is huge: LNG accounts for less than 3% of all U.S. natural gas volume.
Coal, the other fuel
Here's just about all you need to know to predict the future of coal:- It now costs less to produce electricity from coal than from either oil or natural gas, although it costs more to build a coal-fired electricity plant.
- The United States has vast reserves of coal.
- Politicians in energy-hungry states are willing to do just about anything to bring cheaper electricity to voters.
The result is a deal like that signed by the governors of Nevada, California, Wyoming and Utah to build a 1,700-mile power line to bring electricity from the coal-rich states of Wyoming and Utah to electricity-hungry California and Nevada. It will take at least 10 years to build the line (hey, I said it was a long-term investment), but when it's built, it will vastly expand the market for coal.
And this is just one of many projects to expand the role of coal in generating electricity. Peabody Energy, the world's largest commercially owned coal company with vast deposits in the West, Southwest and Eastern United States, is ideally positioned to take advantage of coal's role as one of the fuels of the future.
Coal? A fuel of the future? I think that's an accurate projection for the next 10 years. But projections have a way of going astray. Certainly the future looks very different to me now than it did in 1999, when I asked readers to help me put together the Future 50 portfolio of tomorrow's blue chips. In my next column I'm going to take a look at that portfolio and why the future looks so different than it did a little more than five years ago.
New developments on past columns
5 stocks for the energy and metals boom
What's going on with oil prices? It depends on which oil price you watch. If you look at the spot price for sweet light crude, it hit a seven-week low at $49.75 on April 13 before closing just above $50 a barrel. Looking at the action in this price, you'd have to conclude that oil was set to move strongly below $50 a barrel on reports of higher oil inventories. If you look at the price of oil futures for September, however, the story is very different. Futures for September delivery were at $54.35 on April 14 at a time when spot prices for oil for May delivery were at $51.15. That's a huge spread, and it testifies to oil traders' belief that current relatively low oil prices won't last. The prices in the market are saying, in my opinion, that supply remains tight and is running ahead of demand at the moment only because of luck. That is, nobody has blown up a major oil pipeline or terminal, no oil workers have staged a massive strike, and no politician has done something stupid to shut down supply lately. This luck is only temporary, and when it runs out, oil prices will go back up. The gap between the price for May and September delivery may, in fact, be part of the reason for the recent runup in oil inventories. Oil speculators can make a good profit by buying oil now at $51 and holding it for sale in September at $54, even discounting their storage costs. Unless the price of oil for September delivery starts to come down, I don't expect the current decline in oil prices for May to continue.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Canadian Natural Resources and TransCanada . He does not own short positions in any stock mentioned in this column.
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