Bill Baruch, president and founder of Blue Line Futures, previews E-mini S&P, Gold, Crude, Forex...
04/28/2006 12:00 am EST
"The entire Middle East is slipping into a chaotic frenzy," cautions Martin Weiss, whose workshops are always standing room only. Here, in line with his view that oil is heading to $100 a barrel, he looks at a pair of favorite energy trusts as a hedge against turmoil.
"Throughout the region, political parties rooted in Islamic fundamentalism are gaining ground. I always hope for a peaceful resolution. But at the same time, I recommend you face the grim reality of looming wars- between the East and West, between Shiite and Sunni Muslims, between the rich elites and the poor masses in the region, and with Iran, Hamas, and a new Islamic revolution brewing in Pakistan. Overall, continued turmoil is bound to get worse.
"First, expect oil prices to surge to $100 and beyond. Iran produced 4.1 million barrels of oil per day last year. Saudi Arabia produced 9.6 million. Algeria, 1.8 million. Any religious, ethnic, or economic conflict can only gum up the works. In Iraq, sabotage has helped drive production down 21% since 2001, despite huge US investments in their infrastructure. In Saudi Arabia, car bombers recently tried to blast their way into an oil processing center that is responsible for two-thirds of Saudi output. The attack failed. But it could be just the beginning.
"Even before the latest turn of events, oil was headed to $100 a barrel and beyond, with big gains for our favorite energy shares. Now, this ongoing surge in Mid-East unrest adds even more weight to our argument. We've liked the energy trusts for a long time. They deliver solid capital appreciation, nice, steady high yields, and a relatively conservative way to play the long-term rise in crude oil and natural gas.
"Our favorite is Enerplus Resources Fund (ERF NYSE), which is up 52% in the last year. It yields a handsome 8.5%. And it keeps churning out good news. Right now, for example, CEO Gordon Kerr says he's shopping for more oil and natural gas properties in the US, and the company even opened an office in Denver to scout for state-wide opportunities. The result is that we anticipate more deals like last year's $92 million purchase of Sleeping Giant and the $421 million purchase of Lyco Energy. These will increase Enerplus' reserves, beef up production, and boost profits.
"If you own Enerplus, stick with it. If not, buy at the market, with a stop-loss order at $35.25. And whether you own Enerplus or not, now's a good time to add the next likely mover in this sector, Provident Energy Trust (PVX NYSE), another energy trust positioned to make the most of a new surge in energy prices. Last year, this Calgary-based trust produced an average of 34,000 barrels of oil equivalent per day. In Canada, its oil and gas fields are concentrated in Alberta and Saskatchewan; and in the US, they're mostly in California and Wyoming.
"It trades at only about $11.50 a share, and it's selling for just 8.5 times its estimated earnings. The best part is that it pays out 12 Canadian cents per unit each month (just over 10 US cents at recent exchange rates). That's a dividend yield of 11%. Provident vastly expanded its operations late last year by purchasing Encana's natural gas liquids business for $772 million. The deal makes Provident a major player in gas processing, extraction, and distribution. Our recommendation is to buy PVX at $12 or better. Then protect the position with a stop loss order at $9."
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