oil prices

The recession has hurt the earnings of these two high-quality shipping companies. However, both are doing a good job of controlling their costs. This should improve their profitability, particularly as the economy rebounds. The recent drop in fuel costs also brightens their prospects. However, we prefer FedEx to Arkansas Best right now, as its larger international operations lower its reliance on North America. FEDEX CORP. $74 (New York symbol FDX; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 312.5 million; Market cap: $23.1 billion; Price-to-sales ratio: 0.7; WSSF Rating: Average) delivers packages and documents in the U.S. and over 220 other countries. FedEx earned $0.58 a share in its first quarter, which ended August 31, 2009. That’s down 52.8% from $1.23 a year earlier. Revenue fell 19.7%, to $8 billion from $10 billion. Like most shipping companies, FedEx added a surcharge to its fees when fuel costs were rising. But now that oil prices have fallen to around $77 a barrel from last year’s peak of $148, FedEx is getting less revenue from these surcharges....

CHEVRON CORP. $76 (New York symbol CVX; Conservative Growth Portfolio, Resources sector; Shares outstanding: 2.0 billion; Market cap: $152.0 billion; Price-to-sales ratio: 0.8; WSSF Rating: Above Average) is the second-largest integrated oil company in the U.S. by market cap, after Exxon-Mobil. Chevron gets about 85% of its earnings from producing oil. The remaining 15% comes from its refineries, its petrochemicals business and its 22,000 gasoline stations, which operate under the Chevron, Texaco and Caltex banners. Chevron has increased its oil and natural-gas reserves by roughly 1 billion barrels a year for the past seven years. At the end of 2008, it directly controlled 7.9 billion barrels, plus an additional 3.3 billion through joint ventures and affiliated businesses. The company produces about 920 million barrels a year. ...

POTASH CORP. OF SASKATCHEWAN, $105.95, Toronto symbol POT, rose 3% this week on speculation that Australia-based BHP Billiton plc (New York symbol BHP) may try to buy the company. BHP is the world’s largest mining company, and a recommendation of our Wall Street Stock Forecaster newsletter. BHP is developing a potash mine near Potash Corp.’s operations in Saskatchewan, so combining these would offer some cost-cutting opportunities. Moreover, potash prices are low right now, so it would make some sense for BHP to make an offer. That’s not reason enough to buy shares of Potash Corp., but it adds to their appeal. Meanwhile, Potash Corp. earned $0.82 a share in the three months ended September 30, 2009 (all amounts except share price in U.S. dollars). That’s down 79.1% from $3.93 a year earlier. Sales fell 64.1%, to $1.1 billion from $3.1 billion....

TRANSALTA CORP., $21.86, Toronto symbol TA, will pay roughly $755 million, or $5.25 a share, for Canadian Hydro Developers Inc. (Toronto symbol KHD). The purchase price is 15.4% higher than TransAlta’s earlier offer of $4.55 a share. Canadian Hydro is currently trading at $5.22, which indicates that investors do not expect a better offer. TransAlta aims to complete the purchase in the next month or two, once Canadian Hydro shareholders approve the takeover. TransAlta will also assume Canadian Hydro’s $876-million debt. To put these figures in context, TransAlta’s 2008 cash flow was $828 million, or $4.16 a share....

PRECISION DRILLING TRUST $6.70 (Toronto symbol PD.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 275.6 million; Market cap: $1.8 billion; Price-to-sales ratio: 1.3; SI Rating: Extra Risk) provides contract-drilling services to oil and gas producers. Its clients are located in western Canada, the U.S. and Mexico. The trust owns a fleet of 388 drilling rigs. Precision has been able to avoid cutting its rates to attract new business. That’s because rising oil prices have spurred demand for its drilling rigs. As well, many of Precision’s customers are locking in new contracts now because drilling services may become more expensive in the next year or two. The trust is also building new rigs for specific purposes and types of terrain. Demand for these models is growing strongly, so Precision can charge more for them than for its general-purpose rigs....

These four resource stocks are more risky than, say, Imperial Oil or EnCana. Still, we feel that their large reserves and low-cost operations put them in a good position to take advantage of rising demand for commodities as the global economy recovers. However, only three are buys right now. POTASH CORP. OF SASKATCHEWAN $96 (Toronto symbol POT; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 295.6 million; Market cap: $28.4 billion; Price-to-sales ratio: 3.6; SI Rating: Average) is the world’s largest fertilizer producer. The company operates six potash mines in Saskatchewan and one in New Brunswick. The reserves of five of these mines should last between 60 and 97 years. The other two mines have minimal or undetermined reserves. The stock hit an all-time high of $246 in June 2008, but fell to $62 last December. The drop was caused by lower prices for crops, which hurt demand for fertilizers like potash. As well, farmers in North America and Australia are seeing better-than-expected crop yields this year, even though they applied less fertilizer. This is mainly because of good weather and large amounts of residual fertilizer in the soil from last year....

ATLANTIC TELE-NETWORK, $50.19, symbol ATNI on Nasdaq, has raised its quarterly dividend by 11.1%, to $0.20 a share from $0.18. The shares now yield 1.6%. This was the company’s eleventh consecutive annual dividend increase. In June, Atlantic agreed to buy more than 800,000 wireless accounts from Verizon Wireless for $200 million in cash. The subscribers are mostly in rural areas of Georgia, North Carolina, South Carolina, Illinois, Ohio and Idaho. The deal should close by the end of this year. These new accounts will bring Atlantic’s total number of wireless subscribers above one million, up from 200,000 today, and make it one of the largest wireless carriers in the U.S....

Imperial Oil has 25 years worth of oil and gas reserves. But it also owns four 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 1,900 Esso gas stations. This diversification helps shield the company from volatile oil and gas prices. It also makes Imperial Oil an ideal resource stock for safety-conscious investors. IMPERIAL OIL $40.75 (Toronto symbol IMO; Shares outstanding: 847.6 million; Market cap: $34.5 billion; SI Rating: Average) is Canada’s largest integrated oil company. Imperial earned $0.25 a share in the three months ended June 30, 2009. That was down 80.5% from $1.28 a share a year earlier. Falling oil and natural-gas prices were the main reason for the drop. As well, Imperial’s Cold Lake and 25%-owned Syncrude oil-sands projects were closed for maintenance during the quarter. Revenue fell 40.1%, to $5.3 billion from $8.6 billion....

ENCANA CORP. $62 (Toronto symbol ECA; Shares outstanding: 750.2 million; Market cap: $46.5 billion; SI Rating: Average) has announced that it will split itself into two separate companies. One will keep the EnCana name, and will focus on unconventional natural gas. The other will operate as Cenovus Energy Inc., and will specialize in oil-sands projects, oil refineries and conventional natural gas. EnCana had hoped to complete the split in early 2009, but the stock-market decline and tight credit markets delayed the transaction....

NEWELL RUBBERMAID INC. $16 (New York symbol NWL; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 277.7 million; Market cap: $4.4 billion; Price-to-sales ratio: 0.7; WSSF Rating: Average) makes plastic storage bins, tools, window blinds, pens and a number of other household items. Its top brands include Rubbermaid, Sharpie, Paper Mate, Waterman and Levolor. In response to falling sales, Newell is closing plants and streamlining its distribution operations. It’s also selling low-margin businesses, particularly those that use large amounts of plastic resins. These are made from oil, so these moves will cut Newell’s exposure to volatile oil prices. In all, the company will pay $475 million to $500 million in severance and other costs. However, the plan should lower Newell’s costs by $175 million to $200 million a year by the end of 2010. So far, the company has realized $100 million of these savings....