North of the Border

04/08/2005 12:00 am EST

Focus:

Gregory Spear

Editor and President, The Spear Report

"Simply put, the writing on the wall says that the industrialized world is entering a period of increasing global competition for essential resources, particularly energy-related," says Gregory Spear. "Conceivably, it could last for decades." Here, he discusses some favorite energy plays.

"There are many ways to play the bull market in resources and it is important not to fall into a speculative mode. We are not trying to play a pure momentum game here. Rather, we are looking for companies with terrific prospects that represent real value right now. With US reserves dwindling and Middle Eastern reserves mired in a contentious and potentially unstable geopolitical situation, we believe investors would do well to focus their energy investments on Canada.

"Precision Drilling (PDS NYSE) owns and operates over 220 drilling rigs, which is about half the total number of rigs in operation in Canada at this time. True to their name, Precision is a high-tech contractor for major oil and gas companies. The company is a one-stop shop for drillers. Like many Canadian energy companies right now, Precision is growing quickly by expanding its worldwide footprint into South America, Central America, Europe, Africa, the Middle East and Asia Pacific. One reason is that the company has a reputation for being able to drill where no one has drilled before. In mid-February the company reported earnings per share for the year of $4.22, up 29%. Revenue increased by 22% in 2004 to $2.3 billion. Less than half the 54 million share float is owned by institutions, which leaves room for accumulation and long-term support. In other words, we expect institutions will be buying PDS on any weakness over the next few years. Technically speaking, all the drillers are over-extended at this time, yet, they show no signs of developing vertigo. Any pullback would be a buying opportunity.

"Suncor (SU NYSE) is an energy pioneer focused on the oil sands of Canada, which have proven reserves approaching that of Saudi Arabia. They were the first company in the world to open a commercial-scale oil sands processing plant. Suncor also produces natural gas, as well as working on alternative energy sources. They have several wind power projects underway in Canada and are considering projects in hydropower, biomass, landfill methane, and solar power. And let's not forget their US refinery and retail operations in the US. Over the last 12 years, production costs at Suncor have fallen from C$18 to C$12 a barrel. The oil sands business, however, while having zero exploration risk (they know exactly where the sands are) is capital intensive. Still, net earnings in 2004 were flat with 2003 after the company invested $1.8 billion in capital spending. Like all the energy names,  SU is overbought and we'd love to see a pullback. This is a company we like for the long term, as oil sands are likely to play an increasingly important role in North American oil production and also happen to represent a likely investment or acquisition target for China."

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