Two Big Energy Values

09/01/2010 1:00 pm EST

Focus: STOCKS

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says energy prices are drifting back towards their lows amid economic weakness, but he finds two potential winners.

The average investor is now sitting on losses in 2010. It’s like a bad dream all over again. The bulls all along believed this would be another “normal” economic recovery followed by a surge in output, but that’s not happening. Jobs are nowhere to be seen, housing is still deflating, and loan demand remains very weak to nonexistent in a fractured economy struggling to gain momentum.

Bad markets create good buying opportunities. I’m seeing that now in the energy space, with superb companies selling for a song and natural gas and the Canadian oil sands companies bordering fresh 52-week lows as oil prices and natural gas decline further.

The fact that oil prices have held in the $70 to $80 [a barrel] area, despite a lackluster global economic recovery, highlights the delicate balance between supply and demand. A narrow range exists between $70 and $80, with the wider range between $65 and $87 a barrel.

In the absence of a major breakthrough in alternative energy technologies, oil prices seem destined to move higher in the years ahead as supplies of cheap oil continue to dwindle as major producers struggle to replace annual production.

Indeed, it looks pretty bleak for oil and gas now. Yes, demand is weakening and inventories are rising. Oil inventories are now at their highest levels since 1990, and natural gas supplies remain buoyant, glutting an already depressed market.

The trend is not our friend at the moment. Oil and gas prices are in a down trend. Yet, I’ve never made serious money buying high; the way to invest in these markets is to buy when everyone else is bearish and get your price.

What I care about are values—and big values are emerging in the energy space.

I like EnCana (NYSE: ECA) and Cenovus Energy (NYSE: CVE) even more at [their current] lower prices. EnCana, a natural gas giant, and Cenovus, a Canadian oil sands player, both trade at or near their 52-week lows right now. They also pay about 3% in annual dividends.

EnCana, which spun off its oil sands division—Cenovus Energy—late last year, rank as the best-managed energy companies in Canada. Both stocks are down sharply this summer.

EnCana suffered a poor second quarter mainly related to a $500-million foreign-exchange-related loss on currency hedging. I’m expecting the Canadian dollar to correct this summer, and if that’s the case, then earnings should receive a boost in [the third quarter]. Buy EnCana up to $30. (It closed at around $27.50 Tuesday—Editor.)

In sympathy with falling oil prices, Canadian oil sands’ producers are also way down. Cenovus Energy is my favorite company in this space, because of top-flight management and quality assets. Buy Cenovus Energy up to $27.50. (It closed just below $27 Tuesday—Editor.)

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