oil prices

Oil has dropped from $74 U.S. a barrel in June to $60, and could fall further. We depend on resource industries more than the U.S. does, so the drop in oil and other commodities pushed down the Canadian dollar from $0.92 U.S. in May to $0.86 today. CAE INC. $6.68 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 255.1 million; Market cap: $1.7 billion; Price-to-sales ratio: 1.0; SI Rating: Average) stands to gain from both developments. CAE makes flight simulators and operates pilot-training facilities. Lower fuel prices leave its airline customers with more cash to spend on new simulators and training. Falling oil prices cut consumer costs, leaving more funds for travel....

The recession continues to drive down railway volumes and stock prices. However, both CN and CP have been cutting costs, which will help them increase their profits once the economy starts growing again. As well, both recently made acquisitions in the U.S. that should fuel their growth. CANADIAN NATIONAL RAILWAY CO. $45 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 468.4 million; Market cap: $21.1 billion; Price-to-sales ratio: 2.5; SI Rating: Above Average) operates the largest freight-rail network in Canada. It also serves 16 U.S. states. In the three months ended March 31, 2009, CN’s revenue fell 3.5%, to $1.86 billion from $1.93 billion a year earlier. The recession cut freight volumes, and CN lowered its fuel surcharges in response to the drop in oil prices. Earnings rose 0.7%, to $302 million from $300 million. Earnings per share rose 3.2%, to $0.64 from $0.62, on fewer outstanding shares. These figures exclude several one-time items, including a gain on the sale of a Toronto rail line and expenses related to CN’s recent takeover of a Chicago-area railway. Still, the company benefitted from a lower income-tax rate and a weaker Canadian dollar, which increased the contribution of its American operations....

CANADIAN NATIONAL RAILWAY CO. $45 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 468.4 million; Market cap: $21.1 billion; Price-to-sales ratio: 2.5; SI Rating: Above Average) operates the largest freight-rail network in Canada. It also serves 16 U.S. states. In the three months ended March 31, 2009, CN’s revenue fell 3.5%, to $1.86 billion from $1.93 billion a year earlier. The recession cut freight volumes, and CN lowered its fuel surcharges in response to the drop in oil prices. Earnings rose 0.7%, to $302 million from $300 million. Earnings per share rose 3.2%, to $0.64 from $0.62, on fewer outstanding shares. These figures exclude several one-time items, including a gain on the sale of a Toronto rail line and expenses related to CN’s recent takeover of a Chicago-area railway. Still, the company benefitted from a lower income-tax rate and a weaker Canadian dollar, which increased the contribution of its American operations....

Horizons BetaPro NYMEX Crude Oil Bull Plus ETF, $10.20, symbol HOU on Toronto (Shares outstanding: 41.5 million; Market cap: $423.2 million), is an ETF that aims to provide daily investment performance that is double that of the NYMEX crude oil index. It uses options in a way that aims for it to go up twice as much in a day as the underlying index. If the index falls, the ETF will drop by around twice as much. The key point here, however, is that this investment works best if you only hold it for a single day when the price of the underlying index is going up. Otherwise, the costs of using options eat into the value of the ETF. This ETF started trading at around $100 in early 2008. It moved up to $240 by mid-July. By year-end, the price of oil was down below $40, but the ETF was down near $10. You might say the ETF “outperformed oil on the downside” – that it, it fell much faster than oil. That’s because its value was suffering due to the falling price of oil and due to the costs of dealing in options....

FEDEX CORP., $51.45, New York symbol FDX, fell 3% this week, despite reporting better-than-expected earnings. In the fiscal year ended May 31, 2009, FedEx’s earnings fell 91.3%, to $98 million, or $0.31 a share. The company earned $1.1 billion, or $3.60 a share, in the prior year. The drop was largely caused by a $1.2-billion writedown of goodwill related to its 2004 purchase of Kinko’s Inc. (now called FedEx Office), a chain of stores that sell printing and copying services. Accounting rules force companies to write down goodwill if the underlying assets are no longer worth what the company originally paid for them. So far, FedEx has written off about 70% of the $2.4 billion it paid for Kinko’s. The charge also included a goodwill writedown related to a 2006 purchase of a regional trucking firm. Without these charges, earnings per share fell a more modest 35.5%, to $3.76 from $5.83. Still, that beat the $3.66 a share that analysts were expecting....

Many oil and gas trusts have risen lately, along with oil prices, although natural-gas prices remain near their lows. Even so, these three trusts remain cheap in relation to their forecast 2009 cash flows. ZARGON ENERGY TRUST $16 (Toronto symbol ZAR.UN; SI Rating: Speculative) (403-264-9992; www.zargon.ca; Units outstanding: 22.4 million; Market cap: $359.0 million) produces oil and gas in Alberta, Manitoba, Saskatchewan and North Dakota. Its output is weighted 51% toward natural gas and 49% to oil. In the three months ended March 31, 2009, Zargon’s production rose 2.2%, to 9,213 barrels of oil equivalent per day (this measurement includes natural gas) from 9,015. As well, Zargon recently paid $41.4 million for Masters Energy. This will add 1,275 barrels of oil equivalent per day to Zargon’s production, bringing it to an expected average of 10,200 barrels per day this year....

Oil prices are rising again, but it’s unlikely they will soon match or exceed the record highs they hit in 2008. Over the long-term, we feel the best way for conservative investors to profit from volatile energy prices is with integrated oil producers like Imperial Oil. If oil prices rise, it earns more from crude production. But if oil prices fall, Imperial’s refining and marketing operations, which need crude oil to make gasoline and other fuels, will become more profitable. IMPERIAL OIL LTD. $46 (Toronto symbol IMO; Conservative Growth Portfolio, Resources sector; Shares outstanding: 848.9 million; Market cap: $39 billion; Price-to-sales ratio: 1.3; SI Rating: Average) is Canada’s largest integrated oil company. Imperial accounts for about 6% of Canada’s total oil production. U.S.-based ExxonMobil Corp. (New York symbol XOM) owns 69.6% of Imperial’s shares. Imperial gets most of its revenue from its “downstream” businesses. These consist of its four refineries and 1,900 retail gas stations, which operate under the “Esso” banner. Downstream operations accounted for 77% of Imperial’s 2008 revenue, but just 21% of its earnings....

SNC-LAVALIN GROUP INC. $43 (Toronto symbol SNC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 151 million; Market cap: $6.5 billion; Price-to-sales ratio: 1.0; SI Rating: Average) recently bought Newfoundland-based Spectrol Energy Services Inc. for an undisclosed sum. Spectrol sells engineering and technical services to oil and natural-gas producers off Canada’s east coast. SNC hopes the acquisition will let it take advantage of the recent jump in oil prices. However, 60% of SNC’s earnings already come from customers in the resource sector, and commodity prices are still well below last year’s peaks. As well, tight credit markets could make it difficult for these clients to borrow cash for new projects. SNC-Lavalin is a hold.

Green stocks have a lot of conceptual and emotional appeal, but may offer limited investment potential. Investments in environmental or green stocks may need a long time to move from the research or concept stage to profitability in the face of high initial costs and uncertain government subsidies. So they may not be profitable for investors. It’s hard to set up any company that grows into a profitable business. It’s even harder to profit in pioneering fields like those that green stocks generally focus on. But it’s relatively easy to launch a stock promotion that purports to have answers to social problems, or ways to profit from emerging green technology. That’s why stock promotions, of green stocks or anything else, are always more common than legitimate start-ups. Still, even the legit start-ups mostly wind up going broke. Green stocks should never make up more than a modest part of your portfolio. Our view is that if you want to invest so that you make money and help the environment, your best bet is to build a portfolio of well-established companies, spread out across the five main economic sectors. Then, donate some of your profits to worthwhile socially conscious organizations....

MANITOBA TELECOM SERVICES $33.99 (Toronto symbol MBT; Shares outstanding: 64.7 million; Market cap: $2.2 billion; SI Rating: Average) is the main supplier of traditional and wireless telephone services in Manitoba. The company’s wholly owned subsidiary, Allstream, sells telecom services to businesses across Canada. In the three months ended March 31, 2009, Manitoba Telecom’s revenue rose 0.9%, to $482.9 million from $478.8 million a year earlier. The gain was mainly caused by strong demand for wireless and high-speed Internet. These growth areas account for 47% of Manitoba Telecom’s revenue, and continue to offset lower revenue from its traditional telephone services. As well, the recession drove down demand at Allstream, particularly for long-distance services. This lowered the subsidiary’s revenue by 1.0%. Despite the higher overall revenue, Manitoba Telecom’s earnings fell 15.5%, to $45.9 million, or $0.71 a share. The company earned $54.3 million, or $0.84 a share, a year earlier. The drop was mainly caused by lower long-distance volumes at Allstream....