Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Grand Slam in Tar Sands
06/02/2006 12:00 am EST
"Canada is now mostly about one major commodity-oil, " says Eric Roseman. "As one of the most politically stable countries in the world, Canada is now at the forefront of the global energy bull market." Here, the advisor looks at an under-recognized play on Canada's oil sands.
"As the majority of oil-producing nations struggle to meet record global demand coupled with declining production and rising political tensions in areas like Iran, Iraq, Nigeria, and Venezuela, it's no wonder the US, China, and India are looking to Canada as a reliable source for their future energy requirements. Driven largely by Alberta's phenomenal oil and natural gas boom, Canada's exports hit multi-decade highs over the last 12 months.
"Alberta's lucrative oil-sands industry has grown to 42% of all domestic oil output with production forecast to rise 30% in 2006 and double to 1.3 million barrels per day by the end of the decade, according to Statistics in Canada. I nvestors must own energy in the 2000s not just because of the incredible supply and demand fundamentals favoring further bull market gains, but equally, as a hedge against geopolitical chaos.
"Meanwhile, oil companies are making money, big money. I'm seeing rising distributions for the Canadian energy trusts almost every quarter since 2003 while the world's largest oil majors are increasing their dividends. For many Canadian energy trust units, payout ratios should continue to rise, and trusts carrying conservative payout ratios should continue to distribute the same dividends this summer provided crude oil prices remain high. The best way to play Canada's booming energy patch is to buy a diversified trust of trusts holding the best-managed oil companies in the country.
"The Strategic Energy Fund(CA:SEF.UN Toronto) is an investment trust that seeks to provide unit-holders with superior rates of return through a diversified portfolio of oil and gas royalty and income trusts. But unlike other trust-of-trusts, this gem also invests in early-stage energy companies or junior oil stocks supported by strong management and great capital gains potential. This small allocation to junior energy stocks gives the trust an extra "kick" as the bull market rally heads into overdrive in 2006.
" Portfolio manager, Glenn MacNeill, a 28-year veteran in the oil and gas industry, also holds several profitable energy services companies. Many lucrative energy services companies and trusts were mangled during the last sell-off and continue to trade below their all-time highs from last October. As of May 1, 2006, Strategic Energy Fund holds 66% in energy trusts; 11.9% in energy services trusts; 9% in utilities and infrastructure trusts; 6.6% in junior energy companies and 6.5% in private issues. Its top ten holdings include Canada's best energy trusts.
"The Fund's advisor, Sentry Select Capital, currently manages C$2 billion (US$1.7 billion) dollars in assets with 29% of its asset base invested in the Canadian energy sector. Combined with MacNeill's experience and energy investment savvy, the Strategic Income Fund is a winner. But here's the big bonus: As of May 11, 2006, Strategic Energy Fund traded at an 11% discount to its net asset value of C$14.04 per trust. Why buy a basket of top-rated Canadian energy trusts at par value when a superb portfolio such as SEF trades at a double-digit discount?
"And there's more bullish news. The trust provides investors with a regular monthly payout or dividend, an effective C$1.32 per annum or 10.6% per year. If the above isn't mouth-watering enough, consider this: Strategic Energy Fund now sells 17% off its 52-week high of C$14.98- a great entry point for new energy bulls. If I'm right about oil and growing geopolitical risk, the booming Canadian energy patch, the bull market for the Canadian dollar and the powerful capital gains potential from Strategic Energy Fund, then you've got all the ingredients for a grand-slam investment in Canada."
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