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Jubak: Hedge risks with Canadian energy stocks
Canada's political stability and short distance to energy-hungry U.S. consumers make the stocks great hedges against the market's turmoil.
By Jim Jubak
Investors know stocks are down. The volatile Nasdaq has tumbled 11% from its January high and even the stodgy Dow Jones Industrial Average is down 6%.
But they dont know why.
Oh, there are theories all right.
Maybe the stock market is simply taking a normal corrective rest after an almost year-long rally. Stocks were overdue for a pullback that would set a new base for the next stage in the rally. If this view is true, then the damage is likely to be limited and buying on the dip will soon be in order.
But what if this is the reaction of a overextended market to global political unrest -- from the train bombing in Madrid to the Israeli missile attack in Gaza to the disputed election in Taiwan? With stocks trading at what we all know are historically expensive levels, it wouldnt take much to spook the market and keep it frightened. If this view is true, then the current correction could be just the early stage in a season of unrest that will keep nerves on edge through the Athens Olympics and the U.S. presidential elections.
Looking in the rearview mirror
It wont be possible to figure out which side is right until were looking at this market in a rearview mirror. And then, as so often happens, it will all be so clear that the pundits will castigate us for missing the obvious.
But now, without the benefit of that hindsight, Id sure like to hedge my risk and yet still keep the possibility of participating in any market gains.
My best tactic for how to have my cake and eat it too is to buy Canadian oil and gas stocks.
The political stability of Canada and the short distance from Canadian supplies to energy-hungry U.S. consumer make the stocks of Canadian producers and distributors great hedges against the turmoil that's centered on but is by no means limited to the Middle East. These stocks are likely to hold their value or even climb in times of turmoil as the market is willing to pay for safety.
The best of these stocks have considerable upside on their own thanks to stakes in new oil and gas fields off Africas western coast and new supplies from Canadas oil sands that are coming to market.
Doubling production
For example, Canadian Natural Resources (CNQ, news, msgs) produces oil and gas from its developed fields in western Canada. But the company controls 10.2 million acres of undeveloped potential reserves in Canada and is set to double production from its Espoir field off the western coast of Africa. In that region, which is among the worlds hottest new fields for oil and gas exploration and production, the company is also developing a deepwater project that is projected to produce 60,000 barrels per day. It also has struck oil again in the deepwater near Acajou.
Last year, Canadian Natural increased production by 13% from 2002 levels and replaced 130% of its 2003 production with new reserves. Despite all this exploration and development activity, the company will be free cash flow positive in 2004, according to estimates from CIBC World Markets. That means the company will have discretionary cash left over after paying its costs, including bills for expanding exploration and production and any shareholder dividends.
Suncor (SU, news, msgs) is a major player in the development of oil and gas from western Canadas vast deposits of oil sands. The companys Millenium oil sands expansion started in early 2002; projected capacity is 225,000 barrels a day. The Firebag project will add another 35000 barrels a day in 2005. Producing oil and gas from these deposits isnt without risks, such as rising costs due to the difficulty of extracting and refining the heavier oil produced from these sands. But the likely continued high price of oil makes Canadas oil sands extremely viable sources of energy. According to CIBC, Suncor should also be free cash flow positive this year.
Tapping into the pipeline
TransCanada (TRP, news, msgs) owns 24,000 miles of pipeline that move the majority of western Canadas natural gas to markets in Canada and the United States. The company is a long-term play on the growth of Canadian gas production at companies such as Suncor. So TransCanada investors give up some of the leverage in the potential success of a producer like Suncor and also avoid some of the risk if any one companys projects prove disappointing. TransCanada pays a dividend of about 3.8%, not bad in a volatile market. TransCanada should also be free cash flow positive in 2004.
None of these three stocks are as safe, obviously, as sitting in cash if the stock market goes steadily south. But they offer a lot more potential return than the 0.93% yield of a 90-day Treasury note. And thats a reasonable combination in this market.
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 did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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