Adviser Soapbox A Second Chance In The Oil Sand Curtis Hesler, Professional Timing Service, 11.02.05, 12:00 PM ET<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
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MISSOULA, MONT. - I warned you to expect some weakness in September and October, but it is now time to look for a rally. Trading lows are often born during October weakness.
A rally will get the press all lathered up and spouting the bullish case. Fence-sitters will be seduced as the pros finish liquidating their positions. The flurry will be short term, however, and for quick traders only. The key is that resource stocks will recover to new highs, but the others will not.
Long-term investors should stick with resource, commodity-driven issues only, and they should hold their positions.
Admittedly, our Canadian trusts are not growth investments, but they have allowed us to participate in the rising prices of crude oil and natural gas. Energy prices have a good ways to go yet, and although in time the energy trusts will exhaust their reserves, their dividends and share prices will rise over the next year and a half.
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The Canadian dollar is also going to rise over the next two years. That will augment our dividends as well. The trusts will rise and fall with the general market’s tide. They are currently selling off along with everything else. This was expected, and they don’t seem to be any weaker than the rest of the energy sector, nor do I see any unusual volume.
I fully expect to advise you to sell these cash cows someday, and it will be difficult at that point to give up the income. Nevertheless, everything has its day and its sunset. I do not believe that the sun has set on the Canadian energy trusts, at least not the ones we own.
There will eventually be viable energy alternatives, but the problem (which I will go into more in the next monthly letter) is that alternatives are too far in the future and, at this point, are not energy-positive. That is, it takes more energy to produce them than you get back. This is the problem with ethanol, oil shale and hydrogen. But more on this another time.
One energy alternative that is practical now is tar sands. The downside is that although tar sands are now being commercially and profitably converted into crude oil, production volume is still scant and well behind what we need.
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Suncor Energy (nyse: SU - news - people ) is producing some 260,000 barrels a day and is ramping up to increase this to 500,000 barrels a day by 2010. World demand requires an additional 6 million barrels a day in new production to offset depletion, and once world production peaks in the next year or two, this number will accelerate. Even 500,000 barrels a day is a drop in the bucket, but a profitable drop in the bucket for Suncor.
I expect crude prices will rise steeply over the next several years, and that will translate into higher profits for Suncor. They make very good money as long as crude sells for over $20 a barrel. So even if crude prices were to dip (but don’t bet on it), Suncor will still see solid cash flow with which to expand its tar sands operations.
The potential for Suncor is to double from here, but this is not an overnight, short-term investment. It is a year 2010 to 2015 investment. The most worrisome problem within that time frame is a possible buyout. We would make good money in that event but probably not realize the total potential in this company. Can you imagine where Microsoft (nasdaq: MSFT - news - people ) investors might be today if it had been bought out by Intel (nasdaq: INTC - news - people ) or Hewlett-Packard (nyse: HPQ - news - people )?
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The recent dip in crude prices pulled Suncor back to our buy price of $52.90. In fact, it fell to a low of $48.09 on Oct. 14. My advice is to buy Suncor at $52.90 or better for an excellent long-term energy investment.
Some of the other issues on our buy-and hold list hit downside buy prices this month. If those prices are reached, that is the time to do your buying. Buying at or below the recommended prices will go a long way toward managing risk and maximizing profits. Patience!
The energy bull is not over yet, regardless of what the talking heads tell you on CNBC. The media is in the business of selling air time and newspapers. Their incentive is to make themselves money, not make you money. As it is, my Energy Forecaster is still looking bullish.
Excerpted from the mid-October edition of Professional Timing Service. Click here for more of Curt Hesler's analysis and a complete list of his recommended stocks in Professional Timing Service.
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