oil prices

ENCANA CORP $32.07 (Toronto symbol ECA; Shares outstanding: 735.3 million; Market cap: $23.6 billion; SI Rating: Average; Dividend yield: 2.5%) earned $81 million, or $0.11 a share, in the three months ended June 30, 2010 (all amounts except share price in U.S. dollars). The latest earnings were down 82.8% from the company’s year-earlier earnings of $472 million, or $0.63 a share. Cash flow per share fell 13.2%, to $1.65 from $1.90. Revenue rose 10.2%, to $1.5 billion from $1.3 billion. Depressed natural gas prices were the main reason for the lower earnings and cash flow. That decline offset a 7.9% rise in the company’s total production....

CGI GROUP INC., $14.70, Toronto symbol GIB.A, is Canada’s largest provider of computer-outsourcing services. The company’s services help its customers automate certain routine functions, such as accounting and buying supplies. That makes its clients more efficient, and lets them focus on their main businesses. This week, the company reported earnings that matched the consensus estimate. But an unexpected revenue drop caused stock to fall 10%. In its third quarter, which ended June 30, 2010, CGI earned $85.9 million. That’s up 12.0% from $76.7 million a year earlier. Earnings per share rose 20.0%, to $0.30 from $0.25, on fewer shares outstanding....

ENCANA CORP., $32.22, Toronto symbol ECA, fell 4% after the company reported lower-than-expected earnings. In the three months ended June 30, 2010, Encana earned $81 million, or $0.11 a share (all amounts except share price in U.S. dollars). These figures exclude a $340-million loss on hedging contracts that the company uses to lock in selling prices for its natural gas, and a $246-million foreign-exchange loss. On this basis, the latest earnings fell well short of the consensus estimate of $0.22 a share. They were also down 82.8% from the company’s year-earlier earnings of $472 million, or $0.63 a share. Cash flow per share fell 13.2%, to $1.65 from $1.90. Revenue rose 10.2%, to $1.5 billion from $1.3 billion. (Note: The year-earlier figures assume that the break-up of the old EnCana Corp. into the new Encana and Cenovus Energy Inc. took place at the start of 2009 instead of December 1, 2009.)...

The BP oil spill in the Gulf of Mexico will probably lead to greater regulation of offshore drilling. That would hurt the profits of offshore oil and natural-gas producers. However, it should enhance the value of safer onshore oil and gas deposits. Cimarex and Devon focus on onshore oil and gas. They also trade at reasonable multiples to their forecast cash flows. As well, both have low debt and steady development spending. That puts them in a good position to prosper, even if natural-gas or oil prices falter. DEVON ENERGY CORP. $62.67 (New York symbol DVN; SI Rating: Speculative) (405-235-3611; www.devonenergy.com; Shares outstanding: 446.9 million; Market cap: $28.0 billion; Dividend yield: 1.0%) is one of the largest U.S.-based oil and natural-gas explorers and producers. Its production mix is 68% gas and 32% oil....

The BP oil spill in the Gulf of Mexico will probably lead to greater regulation of offshore drilling. Because of the extra costs, energy-exploration firms may turn their attention to safer onshore oil and natural-gas deposits, like Canada’s oil sands. That would help these three companies, which supply equipment and services to oil-sands producers. However, only two are buys right now. SNC-LAVALIN GROUP INC. $45 (Toronto symbol SNC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 151.0 million; Market cap: $6.8 billion; Price-to-sales ratio: 1.2; Dividend yield: 1.5%; SI Rating: Average) is a leading Canadian engineering and construction company. SNC designs and builds large public-works projects, such as roads, bridges, transit systems and water-treatment plants. It also builds mines, chemical plants and electrical power systems. Petroleum and chemical projects accounted for 14% of SNC’s 2009 revenue. Last year, the company designed a new steam-assisted gravity-drainage system for Husky Energy Inc.’s Sunrise oil-sands project. This technology injects steam into a well to loosen the heavy oil and make it easier to pump to the surface. SNC is working on similar systems for oil-sands projects jointly owned by Teck Resources Ltd. and UTS Energy Corp....

Oil prices fell from their July 2008 peak of $148 U.S. a barrel to just under $40 U.S. in February 2009. Prices then more than doubled, to $90 U.S. in May 2010. They have since fallen to $72 U.S., mostly due to worries about a slower-than-expected economic recovery. It will take years before oil exceeds its 2008 high. But it could rebound to $90 or higher. As well, oil is a good hedge against inflation. We feel the best way to cut your risk in the volatile oil industry is by investing in well-established producers like IMPERIAL OIL $38.99 (Toronto symbol IMO; Shares outstanding: 847.6 million; Market cap: $33.0 billion; SI Rating: Average; Dividend yield: 1.1%)....

ARC ENERGY TRUST $19.86 (Toronto symbol AET.UN; Units outstanding: 250.9 million; Market cap: $5.0 billion; SI Rating: Speculative; Dividend yield: 6.0%) produces oil and natural gas in western Canada. Its average daily production of 67,207 barrels of oil equivalent (including gas) is weighted 46% to oil and 54% to natural gas. In the three months ended March 31, 2010, ARC’s revenue rose 39.5%, to $314.1 million from $225.2 million a year earlier. Cash flow per unit rose 16.7%, to $0.63 from $0.54. Increased production and higher oil and gas prices pushed up results. ARC currently yields 6.0%. The trust plans to convert to a conventional corporation on January 1, 2011. However, it has over $2.2 billion in tax losses it can use to delay paying corporate taxes. As well, it will probably pay out only 45% of its cash flow as distributions this year. That low payout ratio will help it maintain its current high yield....

Oil prices fell from their July 2008 peak of $148 U.S. a barrel to just under $40 U.S. in February 2009. Prices have roughly doubled since then, but are unlikely to get back to their 2008 highs any time soon. We think oil prices could rise further if the global economy continues to recover, as we expect. Even so, we continue to advise against overindulging in natural gas and oil stocks. That’s because the Resource sector (including oil and natural gas) is highly volatile, and no one can accurately predict future commodity prices. ...

CHEVRON CORP. $72 (New York symbol CVX; Conservative Growth Portfolio, Resources sector; Shares outstanding: 2.0 billion; Market cap: $144.0 billion; Price-to-sales ratio: 0.8; Dividend yield: 4.0%; WSSF Rating: Above Average) is the second-largest integrated oil company in the U.S., after ExxonMobil. Chevron gets 95% of its earnings by producing oil and natural-gas. The remaining 5% comes from its refineries, petrochemical operations and gas stations. In response to the BP oil spill, the Obama administration has banned some drilling in the Gulf of Mexico. This forced Chevron to temporarily shut down an operational well and an exploratory well. However, these shutdowns will probably have little impact on Chevron. That’s because these wells represent a small fraction of its operations in the gulf. As well, the gulf accounts for just 9% of its overall production....

In response to the BP oil spill in the Gulf of Mexico, regulators will probably require offshore drillers to install more equipment aimed at preventing future spills. These extra costs would hurt the profits of companies that are active in the Gulf, including Chevron and Apache. However, any new costs would have little impact on their long-term prospects. As well, the spill should make less-risky onshore producers more attractive. That would favour Encana, with its growing unconventional natural-gas reserves, and Cenovus, which focuses on the oil sands. CHEVRON CORP. $72 (New York symbol CVX; Conservative Growth Portfolio, Resources sector; Shares outstanding: 2.0 billion; Market cap: $144.0 billion; Price-to-sales ratio: 0.8; Dividend yield: 4.0%; WSSF Rating: Above Average) is the second-largest integrated oil company in the U.S., after ExxonMobil. Chevron gets 95% of its earnings by producing oil and natural-gas. The remaining 5% comes from its refineries, petrochemical operations and gas stations....