oil prices

Long-time readers may recall that in the mid-1990s, I started writing about three special factors that I felt were likely to make stock prices go higher, and continue rising longer, than most investors expected. These special factors or “economic energizers” were:

1. Economic liberalization and the spread of free enterprise around the world, following the end of the Cold War and the break-up of the Soviet Union.
2. The maturing of the baby boomers, who were entering the economic prime of their lives.
3. The productivity gains available from modern computer and communications technology.

The 1990s stock market boom did indeed last longer and take prices higher than many expected. Now I’m coming around to the view that we are headed into something similar today. Here are four factors that make me optimistic about the stock market for the next five to 10 years:...

IMPERIAL OIL $54.20 (Toronto symbol IMO; Shares outstanding: 847.6 million; Market cap: $45.9 billion; TSINetwork Rating: Average; Div. yield: 1.0%; www.imperialoil.ca) recently opened the first phase of its massive Kearl oil sands project in Alberta, and the second phase should start up next year. This project will help the company double its production, to 600,000 barrels a day, by 2020. Oil sands projects are harder to operate than conventional properties, and they need high oil prices to earn a profit. However, Imperial’s refineries help shield it from a drop in oil prices because they pay less for the crude they need. The stock trades at a moderate 12.2 times Imperial’s likely 2014 earnings of $4.45 a share....

Encana took its present form on December 1, 2009, after the old EnCana Corp. split itself into two new firms: the new Encana, which focuses on gas, and Cenovus Energy, which specializes in oil sands. Lower gas prices have pushed Encana’s shares down by about 20% since the split. Oil prices have risen, however, and Cenovus’s stock is up about 28%. ENCANA CORP. $22.86 (Toronto symbol ECA; Shares outstanding: 741.0 million; Market cap: $16.9 billion; TSINetwork Rating: Average; Dividend yield: 1.3%; www.encana.com) is one of North America’s largest natural gas producers. Encana continues to benefit from its new plan to focus on six main properties: Montney (B.C.), Duvernay (Alberta), DJ Basin (Colorado), San Juan Basin (New Mexico), the Tuscaloosa Marine Shale (Louisiana) and Texas’s Eagle Ford oil shale....

An interesting historical analogy is playing out right now between the World War I centennial, and Russia’s Ukrainian venture. In fact, you can’t help but wonder if Russia is stage-managing events to foster the analogy. This could balloon the unsettling effects of Russia’s current Ukrainian venture, and cut the cost of acquiring more Ukrainian territory. Comment on World War I mostly centers on the idea that a seemingly minor incident, such as the assassination of an archduke, can topple a series of dominos and set off a global war. From there, it’s not too great a stretch to wonder if another seemingly minor incident, the downing of a Malaysian passenger jet, can do something like that today. It’s in Russia’s interest to have North American and European voters think that way. If so, they are less likely to pressure their governments to get involved. Instead they’ll want a negotiated settlement, which Russia also favours. That way, Russia can acquire parts of eastern Ukraine at only a slightly higher price than it paid for Crimea....

IMPERIAL OIL LTD. $57 (Toronto symbol IMO; Conservative Growth and Income Portfolios, Shares outstanding: 847.6 million; Market cap: $48.3 billion; Price-to-sales ratio: 1.5; Dividend yield: 0.9%; TSINetwork Rating: Average; www.imperialoil.ca) is Canada’s third-largest publicly traded oil company, after Suncor Energy and Canadian Natural Resources. Imperial is a 69.6%- owned subsidiary of U.S.-based ExxonMobil Corp. (New York symbol XOM).

About 80% of Imperial’s oil production comes from its oil sands operations in Alberta, including its 25% stake in the Syncrude project.

It also has conventional oil and natural gas operations in Western Canada and owns interests in offshore projects in Atlantic Canada. Based on its current daily output, Imperial’s 3.6 billion barrels of proven reserves should last 35 years.

...

Imperial Oil recently opened the first phase of its massive Kearl oil sands project in Alberta, and the second phase should start up next year. This project will help the company double its production, to 600,000 barrels a day, by 2020. Oil sands projects are harder to operate than conventional properties, and they need high oil prices to earn a profit. However, Imperial’s refineries help shield it from a drop in oil prices, because they would pay less for the crude they need. IMPERIAL OIL LTD. $57 (Toronto symbol IMO; Conservative Growth and Income Portfolios, Shares outstanding: 847.6 million; Market cap: $48.3 billion; Price-to-sales ratio: 1.5; Dividend yield: 0.9%; TSINetwork Rating: Average; www.imperialoil.ca) is Canada’s third-largest publicly traded oil company, after Suncor Energy and Canadian Natural Resources. Imperial is a 69.6%- owned subsidiary of U.S.-based ExxonMobil Corp. (New York symbol XOM)....

PENGROWTH ENERGY $7.35 (Toronto symbol PGF; Shares outstanding: 527.5 million; Market cap: $3.9 billion; TSINetwork Rating: Average; Dividend yield: 6.5%; www.pengrowth.com) produces oil and natural gas in Western Canada and off the Nova Scotia coast. Gas accounts for 55% of its production; the other 45% is oil. Pengrowth produced 75,102 barrels a day (including gas) in the first quarter of 2014, down 16.3% from 89,702 a year earlier. That’s mainly because it sold several less important oil and gas properties in Western Canada. It’s investing the proceeds in more promising projects, including its Lindbergh oil sands development in Alberta’s Cold Lake region. The company’s cash flow fell 6.9%, to $0.27 a share from $0.29....

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you advice on specific investment topics. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away. Today’s tip: “Ethical or socially responsible investing can be a misleading concept. Often it’s an oversimplified reaction to a complex situation, having little impact on the companies targeted while limiting perfectly good investment opportunities.” From time to time, we are asked about ethical investing (or “socially responsible investing”). I’d say it works as a marketing angle for a handful of small investment companies, and it may make you feel better about your investments. But it won’t do much to improve your investment results, or cut down on what you see as unethical corporate behaviour....

Long Run Exploration Ltd., $5.64, symbol LRE on Toronto (Shares outstanding: 149.6 million; Market cap: $860.1 million; www.longrunexploration.com), produces oil and natural gas in Alberta. Its output is 56% oil and 44% gas. In the three months ended March 31, 2014, Long Run produced 25,613 barrels of oil equivalent per day, up 8.5% from 23,611 barrels a year earlier. Cash flow per share jumped 43.6%, to $0.56 from $0.39. Higher production and oil prices were behind the increase. Long Run continues to grow by acquisition—it just announced the purchase of Crocotta Energy (Toronto symbol CTA) for $357 million. That deal will add about 7,500 barrels a day to Long Run’s output....

BONAVISTA ENERGY $16.63 (Toronto symbol BNP; Shares outstanding: 189.3 million; Market cap: $3.3 billion; TSINetwork Rating: Extra Risk; Dividend yield: 5.1%; www.bonavistaenergy.com) explores for oil and natural gas in Alberta, Saskatchewan and British Columbia. Its production is 65% gas and 35% oil.

In the three months ended March 31, 2014, Bonavista’s cash flow per share gained 40.4%, to $0.80 from $0.57 a year earlier. Production rose just 2.2%, to 73,936 barrels of oil equivalent a day from 72,333. But its realized gas price jumped 55.5%, to an average of $5.07 per thousand cubic feet from $3.26, while oil prices rose 6.2%, to $79.68 a barrel from $75.05.

Bonavista plans to spend $580 million to $600 million on exploration and development in 2014. Its plans include drilling 130 to 135 wells, which will let it raise its average 2014 production as high as 77,000 barrels of oil equivalent a day. For all of 2013, Bonavista spent $460 million to drill 126 wells.

...