oil prices
ZARGON ENERGY TRUST $27.40 (Toronto symbol ZAR.UN; SI Rating: Speculative) (403-264- 9992; www.zargon.ca; Shares outstanding: 17.0 million; Market cap: $466.2 million) has oil and gas production assets in Alberta, Manitoba, Saskatchewan and North Dakota. Output is weighted 56% toward gas and 44% to oil. In the three months ended June 30, 2007, Zargon reported cash flow per unit of $1.05, down 7.9% from $1.14 a year earlier. Production rose 1.7%, to 8,465 barrels of oil equivalent per day, from 8,322 barrels. The lower cash flow came from lower oil prices. Zargon now trades at around 6.5 times cash flow. The company’s debt of $46.7 million is equal to just over two quarters’ cash flow....
Air travel has rebounded strongly since 9/11. But high oil prices could hurt the ability of airlines to invest in new planes and simulators. Although riskier, we feel Bombardier’s wider sources of income gives it greater earnings potential right now than CAE. BOMBARDIER INC. (Toronto symbols BBD.A $6.29 and BBD.B $6.26; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.7 billion; Market cap: $10.6 billion; SI Rating: Extra risk) is the world’s third-largest maker of commercial aircraft, after Boeing and Airbus. It specializes in small business jets, and regional jets that carry around 100 passengers. The company also makes passenger railcars. In its second fiscal quarter ended July 31, 2007, Bombardier earned $0.05 a share, up 66.7% from $0.03 a year earlier (all amounts except share price and market cap in U.S. funds). The most recent quarterly figure excludes a one-time writedown of its investment in a group that’s refurbishing the London, UK subway system. Strong demand for business jets and railcars, particularly in China and Russia, expanded sales by 14.3%, to $4.0 billion from $3.5 billion....
MICROSOFT CORP. $29.46, Nasdaq symbol MSFT, still loses money on each Xbox video game machine it sells, six years after the launch of the first console. Costs to fix a recent Xbox defect also hurt Microsoft’s earnings in its latest quarter. But the company feels profits from selling games will offset these losses. For example, Microsoft sold more than 1.7 million copies of the new Halo 3 video game this week for $170 million. Strong interest in Halo 3 should spur more console sales, and increase demand for online gaming services. Microsoft is a buy. CHEVRON CORP. $93.58, New York symbol CVX, continues to enjoy strong cash flow thanks to rising oil prices. It now plans to buy back up to $15 billion of its stock in the next three years. That’s roughly 7% of its market cap. Share repurchases reduce the number of shares outstanding, and increase future per-share earnings and cash flow....
WASHINGTON FEDERAL INC. $27 (NASDAQ symbol WFSL) has agreed to acquire First Mutual Bancshares, Inc. for $189.8 million in cash and stock. The price is a third more than the $143.1 million or $1.64 a share it earned in fiscal 2006. First Mutual is profitable, and will immediately add to Washington Federal’s earnings. The company also raised its quarterly dividend 2.4%. The new annual rate of $0.84 yields 3.1%. Buy. NEWELL RUBBERMAID INC. $26 (New York symbol NWL) continues to make progress with its restructuring plan. In the second quarter of 2007, earnings before one-time costs rose 19.6%, to $0.55 a share from $0.46 a year earlier. The plan will help Newell to keep paying its $0.84 dividend (3.2% yield). Buy. ALLIANT ENERGY CORP. $38 (New York symbol LNT) has sold all of its international operations as part its plan to focus on core utility operations in Iowa, Minnesota and Wisconsin. The company used the cash from these sales to buy back stock. But high coal and oil prices could hinder its profit growth. Hold....
APACHE CORP. $75 (New York symbol APA; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 332.0 million; Market cap; $24.9 billion; WSSF Rating: Average) explores for and produces oil and gas, mostly in North America. It also has operations in the UK, Argentina, Australia and Egypt. The company reserves are roughly half oil and half natural gas. Apache spends heavily on exploration and acquisitions to replenish its reserves. For example, it recently paid $1 billion for 28 oil and gas fields in Texas. This purchase increased Apache’s oil reserves by 8%, and its gas reserves by 5%. Thanks to this acquisition and increased production at its other properties, Apache’s revenue in the three months ended June 30, 2007 rose 19.1%, to $2.5 billion from $2.1 billion....
It pays to include some oil and natural gas stocks in your portfolio, as an inflation hedge and for exposure to the Resources sector. Even so, we still advise against over-indulging in oil and gas stocks. Global demand for oil and gas will continue to rise. But no one can consistently predict oil and gas price prices. Both will continue to go through wild swings in price. So you’ll profit most with highquality stocks that will prosper even during the inevitable price setbacks. These three energy stocks are down from their peaks over the last couple of months, but are still up from the start of this year. Although all are attractive in relation to earnings and cash flow, only two are buys right now....
QUAKER CHEMICAL CORP. $23 (New York symbol KWR; Income Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.0 million; Market cap: $230.0 million; WSSF Rating: Average) is a small company that is prominent in a small industry. It makes lubricants and specialty chemicals that protect industrial machinery from corrosion. It sells these products mostly to steel, automotive and appliance makers in the United States and Europe. Overseas markets account for 55% of total sales. Most investors have probably never heard of Quaker, and few brokers cover it. But the company is a leader in its niche markets, and has a long history of rising sales and earnings....
Oil and gas producers must spend large amounts every year to replace diminishing reserves, which cuts their short-term profits. But if done right, these projects should last decades. In Canada, most big energy companies are expanding their operations in Alberta’s oil sands region. Although new environmental regulations could add to the already high costs of developing the oil sands, higher oil prices will probably offset these extra costs. Higher prices will also help offset the costs of other expensive projects, such as new pipelines and offshore platforms. These three top energy companies are all doing a good job holding down their operating and capital costs in a volatile sector. All three are also attractive in relation to earnings and cash flow....
Our oil and gas trust recommendations have moved sideways since the start of this year, mainly in line with oil and gas prices. Oil is currently trading at around $65 U.S. a barrel, down from the record high of over $78 it reached in July of last year. Still, global demand for oil continues to rise. Oil prices are up from $60 at the start of this year, although they did fall to as low as $50 in January. Natural gas prices are now at around $7.80 U.S. per thousand cubic feet. That’s well down from the record high of $15.71 U.S. reached in December, 2005 in the wake of hurricane Katrina. It’s up from around $6.80 at the start of this year, but little changed since the end of January....
Rising prices for steel, copper and other raw materials have weighed on profits at all American industrial companies in the past few years. Higher oil prices have also made it more expensive to operate factories and transport goods to customers. The best way to profit from this uncertainty is to focus on high-quality stocks with unique products, high market shares and other factors that give them special appeal. These four industrial stocks have struggled lately, but we see them as a “heads-you-win, tails-you-break-even” situation. That means they should thrive during cyclical peaks, and keep losses to a minimum in economic downturns....