Fuels of the Future

07/21/2006 12:00 am EST

Focus:

Roger Conrad

Founder and Chief Editor, Capitalist Times

Income guru Roger Conrad, editor of Utility Forecaster, has earned tremendous returns with his ability to spot trends well before the rest of the market. Here, he separates fact from fiction about the future of alternative fuels…

 

“Oil shale, ethanol, switch grass, coal-to-liquids technology, coal gasification: The hype is ubiquitous, from claims of ending America’s dependence on imported oil to the myth that these alternatives will reduce fuel costs.

 

“The truth is these nonconventional energy sources will never be as cheap to produce as old-fashioned oil and gas. In fact, their use will increase the cost of fuel, just as government-mandated ethanol in gasoline is now driving up gasoline costs. And it may actually build a floor under fuel prices, since nonconventionals are only economic when regular oil and gas are dear. That’s because a dramatic cut in oil prices would make nonconventionals uneconomic, cutting output and therefore overall supply.

 

“The good news is there’s still plenty of room for nonconventional producers and their investors to make a lot of money, even if they don’t take over the market. Canada’s tar sands output is expected to literally triple by 2020.

 

“Our tar sands play is Pembina Pipeline Income Fund (PMBIF  OTC), which owns and operates a rapidly growing network of transportation assets, including pipelines serving the Syncrude partnership, the biggest oil sands project in operation. Almost all of Pembina’s capital budget is now going to oil sands ventures, including several outside of Syncrude, promising more growth in cash flow and in the dividend, which was boosted 9% this year. Buy Pembina up to 15.

 

“Only oil sands producers capable of riding out a cycle are worth buying. The most attractive is Total (TOT  NYSE), which has two operating oil sands projects and three others in development, in addition to other attractive global ventures. Total’s a low-risk buy up to 65.

 

“I don’t cover–and in fact, advise selling–the most touted oil sands pure plays, Canadian Oil Sands Trust and Suncor, because of their huge leverage and hype, which mean volatility. But I do recommend Encana (ECA  NYSE) on a return trip to the low 40s. Encana has two producing oil sands projects, two under development, and 1.2 million acres of land it intends to explore once it finds 40- to 50-year partners. It also has a host of other nonconventional fuel ventures in North America and a solid balance sheet to boot.”

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