Canada: An Emerging Energy Superpower

02/08/2008 12:00 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape, publisher and editor of The Canada Report, told attendees that Canada’s rising energy stature has created investment opportunities for Americans.

Newsletter editor Gordon Pape told attendees that while many Americans were aware of Canadian income trusts, there is a lot more in Canada for investors to look at. No longer the US’s second cousin, Canada now trails only Saudi Arabia in world oil reserves, making it a bona fide energy superpower.

Pape cited the 140,200 square kilometers of oil sands (larger than the state of Florida), their 30-to-60-year reserve life and the five million barrels of oil expected to be produced daily, by 2030. The price of producing oil from the sands runs at some $20 to $30 per barrel, so the process will be profitable as long as oil prices don’t decline sharply.

He then named two companies that are pure oil sands plays:

Canada Oil Sands Trust (TO: COS.un or OTC: COSWF), an oil sands pioneer, has a 36.7% ownership in the Syncrude project, which amounts to about 40 to 44 million barrels of oil for 2008.

Pape said the story was compelling: increasing production, expanded investment in the company, and an aggressively rising distribution, despite the tax which comes into effect in 2011. The trust has raised its distribution five times since 2005, most recently increasing it by 36%, to 75 cents per unit per quarter, which equates to a current yield of 8%.

Suncor (TO: SU and Nyse: SU), another oil sands pioneer, owns a processing plant in the oil sands and a refinery in Ontario. Additionally, the company operates right down to the retail level, with its Sunoco and Phillips gas stations.

The stock recently lost more than 25% of its value when its fourth-quarter and year-end results came in lower than those of the prior year. It since has bounced back above $90 (from a low of $82) after investors realized the company was adding new facilities that will increase production by 35%, beginning this year. But Pape cautioned investors not to invest in SU for the cash flow, as it is plowing money back into the company and pays a yield of about 0.4%.

Additionally, Pape said the new tax on Canadian income trusts is law and takes effect January 1, 2011. However, many of the oil and gas trusts have tax pools that will allow them to shelter distributions well beyond 2011. On average, most trusts will be able to shelter income for an extra four years, to 2015. Some have pools as long as eight years, some as short as 1.8 years, so it is important for investors to find out about those pools for any trust they’re considering.

Second, some of the trusts draw much of their income from outside Canada, which is already taxed, and already built into their distributions.

Third, since the shares of trusts have already declined substantially, there is a general feeling that the market has already priced in the tax and most won’t see dramatic drops in prices in 2011. The initial tax rates also have been reduced, from 31.5% to 29.5% in 2011 and then to 28% in 2012.

Finally, 25 or so trusts were taken over in the first half of 2007, most at 20%-35% premiums. That activity stopped in the second half because of the credit crunch, Pape predicts that we will see a lot more later this year and in 2009, which might be an opportunity to cash in on more premiums.

His advice: there is still money to be made in these trusts. And if you already own good quality trusts, this is not the time to sell.

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