oil prices

SeaDrill Ltd., $32.64, symbol SDRL on Nasdaq (Shares outstanding: 443.3 million; Market cap: $14.5 billion; www.seadrill.com), is a leading offshore drilling company. Norway-based SeaDrill has a fleet of 60 drilling rigs that can operate in shallow to very deep water. In the three months ended June 30, 2011, SeaDrill’s revenue rose slightly, to $995 million from $993 million a year earlier. Earnings jumped to $645 million, or $1.29 a share, from $329 million, or $0.72 a share. However, the latest quarter included a $416-million pre-tax gain on the sale of securities. Operating earnings, which exclude that gain, rose 12.3%, to $430 million from $383 million. The company’s debt is very high, at $9.7 billion, or 66.9% of its market cap, but it does hold cash of $528 million, or $1.12 a share....

You might call it fair-weather investing. Many investors prefer to buy stocks only when economic and financial conditions seem good, if not ideal. When there’s news of rising oil prices or interest rates, for instance, they are inclined to stay out of the market, or get out if they’re already in. Yet when they think conditions are ripe, these “fair-weather” investors can be surprisingly casual about what they buy. They readily accept recommendations from brokers, or they buy stocks that are touted by public-relations firms. They give promoters and insiders the benefit of the doubt....

Many investors avoid small cap stocks, because they tend to more volatile than larger companies. You can offset this risk by sticking with small caps that are leaders in their niche markets. Here are three of our favourite small-cap stocks. However, only two are buys right now. MTS SYSTEMS CORP. $37 (Nasdaq symbol MTSC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 15.6 million; Market cap: $577.2 million; Price-to-sales ratio: 1.3; Dividend yield: 2.7%; TSINetwork Rating: Average; www.mts.com) makes equipment and software that tests materials, machines and structures. This helps manufacturers lower their costs and improve the quality of their products. MTS continues to see strong demand for its technology. New orders rose 27.5% in its 2011 fiscal year, which ended October 1, 2011, to a record $540.0 million from $423.5 million in 2010....

Encana (which focuses on natural gas) and Cenovus (which focuses on oil) took their present form in December 2009 following the breakup of the old EnCana Corp. New shale gas discoveries have pushed down gas prices. That has hurt the new Encana. Cenovus has fared better, due to stronger oil prices. We still see both as buys due to their their high-quality reserves and strong cash flows. ENCANA CORP. $18 (New York symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 735.4 million; Market cap: $13.2 billion; Price-to-sales ratio: 1.9; Dividend yield: 4.4%; TSINetwork Rating: Average; www.encana.com) has agreed to sell some of its natural gas properties in northern Texas for $975 million. The sale is part of the company’s ongoing plan to focus on its main properties in Alberta, B.C., Wyoming, Colorado and Louisiana. Including this sale, Encana will have sold $1.7 billion of properties in 2011. That’s within its original target of $1 billion to $2 billion....

SHERRITT INTERNATIONAL $5.45 (Toronto symbol S; TSINetwork Rating: Speculative) (1-800-704-6698; www.sherritt.com; Shares outstanding: 296.4 million; Market cap: $1.6 billion; Dividend yield: 2.8%) reports that its earnings per share jumped 114.3% in the three months ended September 30, 2011, to $0.15 from $0.07. Revenue rose 13.0%, to $466.4 million from $412.7 million a year earlier. The improved results were mainly due to higher coal and oil prices. Sherritt is a natural-resource company that produces nickel, cobalt, thermal coal, oil and gas. It also manages 376 megawatts of power-generation capacity in Cuba....

Because of today’s high government debt, high joblessness and high deficit spending, many people expect we’ll have to suffer through rising taxes and weak economic growth for the next decade. This belief makes sense, but only if you disregard recent developments in energy. Before the start of the financial crisis, pessimists used to look on spikes in oil prices as the greatest threat to the world economy. Oil is a key factor in a lot of industrial activity, as a raw material or as fuel for transportation. Oil is also concentrated in a few locations around the world, particularly the Middle East, so it’s vulnerable to transport bottlenecks that result in supply shortages. When oil prices shoot up, the economy suffers. This, though, could change in the next few years due to the development of oil and gas production from shale and other so-called “tight rock”. Shale oil and gas discoveries are turning up all around the world. New technology can bring these finds to profitability in as little as eight months, compared to two years or so for many conventional finds....

Canadian Natural Resources Ltd., $37.23, symbol CNQ on Toronto (Shares outstanding: 1.1 billion; Market cap: $41.0 billion; www.cnrl.com), operates in western Canada (including its 100%-owned Horizon Oil Sands Project), the North Sea and off the coast of West Africa. The company’s product mix is about 85% oil and 15% natural gas. Canadian Natural gets about 84% of its production from its conventional North American oil-and-gas properties, which are located in B.C., Alberta and Saskatchewan. The company also has heavy oil operations in Alberta’s Athabasca region, at Pelican Lake, Primrose North, Primrose South and Primrose East. The company started up its Horizon Oil Sands Project in 2009. In January 2011, a fire in a processing unit forced Canadian Natural to halt production at Horizon. Production resumed on August 16, 2011....

New technologies are helping to unlock the vast reserves of the oil sands and shale-gas fields in North America. However, the extra production could hold back oil and natural gas prices. That’s why we feel it’s a great time to own our favourite integrated oil producer Imperial Oil. Besides drilling for oil, Imperial also owns refineries which convert crude oil into gasoline and other fuels. These operations profit when oil prices fall, because they pay less for the crude they refine. Imperial also operates 1,850 Esso gas stations. That helps diversify the company’s business, and further cuts its risk. IMPERIAL OIL LTD. $42 (Toronto symbol IMO; Shares outstanding: 847.6 million; Market cap: $35.6 billion; Price-to-sales ratio: 1.3; Dividend yield: 1.0%; TSINetwork Rating: Average; www.imperialoil.ca) is Canada’s third-largest publicly traded oil company, after Suncor Energy Inc. and Canadian Natural Resources Ltd. Imperial is a 69.6%-owned subsidiary of U.S.-based ExxonMobil Corp. (New York symbol XOM)....

Connacher Oil & Gas, $0.47, symbol CLL on Toronto (Shares outstanding: 448.0 million; Market cap: $210.6 million; www.connacheroil.com), produces bitumen at its Great Divide Pod One and Algar projects in Alberta. It also owns conventional crude oil and natural gas assets in central Alberta, and it operates a heavy oil refinery in Great Falls, Montana. Extracting oil from oil sands is hugely expensive. That makes oil sands profit more vulnerable to a drop in oil prices. In addition, Connacher has built up significant long-term debt by investing in its oil sands projects. It has refinanced its $930.8 million debt at lower rates, but the debt is still a very high 4.4 times its $210.6 million market cap. Connacher has been rumoured to be a takeover candidate for a while, but its low production, high costs and large debt could make it less attractive to potential buyers. Meanwhile, it needs to find a partner to help finance any expansion of its operations. Alternatively, it may need to sell some of its assets to raise cash....

TRILOGY ENERGY CORP., $35.29, symbol TET on Toronto, owns oil and gas properties in the Kaybob and Grande Prairie areas of central Alberta. About 71% of Trilogy’s production is natural gas. The remaining 29% is oil. In the three months ended September 30, 2011, Trilogy produced an average of 29,035 barrels of oil equivalent per day (including natural gas). That was up 29.3% from 22,462 barrels a day a year earlier. Trilogy’s daily production should rise to an average of 30,000 barrels for all of 2011. Cash flow per share rose 82.1%, to $0.51 from $0.28 a year earlier; the production increase and higher oil prices were the main reasons for the gain....