It's not too late to board oil bandwagon
One tip is to invest in oil producers whose pricing isn't hedged
VANCOUVER - With the price of crude at its peak, followed by rising gasoline costs, many investors are wondering how they too can start pocketing some oil profits from their investments.
Money managers say it's not too late to jump on the oil and gas bandwagon, particularly if you are selective about which stocks to buy.
One tip is to invest in oil producers whose pricing isn't hedged, but instead tied to spot prices, which surpassed US$123 last week, up 75 per cent from the same time last year and more than double from January 2007.
Those companies may include intermediates such as ProEx Energy Ltd. (TSX:PXE) and Storm Exploration (TSX:SEO) and large caps such as Husky Energy Inc. (TSX:HSE), Imperial Oil Ltd. (TSX:IMO) and Petro-Canada (TSX:PCA).
Joanne Hruska, vice-president of portfolio management at Aston Hill Financial in Calgary, said hedging is sometimes a good move, but with the recent surge in oil prices some companies have seen the strategy backfire.
Major natural gas producer and oilsands operator EnCana Corp. (TSX:ECA) reported a first-quarter hedging loss of $737 million after tax after being committed by contracts to sell about 40 per cent of its natural gas output at predetermined prices. That prevented it from taking full advantage of higher spot gas prices in the energy market.
"A lot of people have hedges, so please Mr. and Mrs. Layman investor, look for sources of hedging or ask your famous portfolio managers," said Hruska, who bought EnCana shares after that loss was reported. She believes the stock is a good buy today for other reasons, including the turnaround in natural gas prices.
Another way to benefit from the rising price of oil is to consider companies such as Enbridge Inc (TSX:ENB) and TransCanada Corp. (TSX:TRP) who build the pipes to carry the crude.
And while refiners and integrated companies may be getting squeezed by oil's surge, experts say don't rule them out either, especially if you are a long-term investor.
"The refiners have had a tougher time over the last little while," said Hruska, but she said companies such as Petro-Canada are trading at cheap multiples and could be good investments long-term.
Hruska also said royalty trusts should get a second look from investors after their value dropped following the news 18 months ago that they would be taxed as corporations starting in 2011.
"People have overlooked the royalty trust sector because of this overhang coming in 2011," said Hruska, adding that they used to have a strong premium to their intermediate and large cap competitors because of their eight-to-12- per cent yield.
The recent lift in natural gas prices has also given some related trusts a lift.
Gavin Graham, chief investment officer at the Guardian Group of Funds, said most investors shouldn't make their decisions based solely on the price of oil.
"Regardless of whether oil is going up or down from there, these are profitable businesses that grow over time," said Graham.
He said investors should not only consider oil and gas companies, but others than work with the industry and are benefiting from its growth, such as Caterpillar heavy equipment dealer Finning International (TSX:FTT).
Earlier this week, Finning announced a $360 million contract to supply giant Caterpillar mining trucks and huge bulldozers to Suncor Energy (TSX:SU), which is expanding its oilsands operations in northern Alberta.
There are also companies that receive a spinoff benefits from the oil boom, including restaurant chain Boston Pizza Royalites Income Fund (TSX:BPF.UN), one of many businesses that feeds hungry oilpatch workers.
"There are a whole bunch of those type of beneficiaries of this resources boom which maybe immediately don't come to mind," said Graham. "And they are good places to be if you believe this is sustainable".
If oil sinks back down to the US$50 mark, Graham said the advice might be different, but given that oil is above US$120 without being spurred by a hurricane or disruption in the Middle East, it's likely oil prices will remain high.
John Stephenson, senior vice-president and portfolio manager at First Asset Management also believes oil prices will remain high, thanks to demand from the fast-growing economies of China and India.
"This is a miracle fuel in the case of oil. You can use if for everything; transportation, comfort, commerce," Stephenson said.
"Right now there is no other choice and we have huge demand."
Adrian Mastracci, portfolio manager with KCM Wealth Management, said while a lot of the "easy money" has been made in the energy sector already, more profit can be made by investors who can stomach the volatility, especially with future forecasts ranging from $80 to $200 for a barrel of oil.
"Nobody knows what's going to happen a few years from now, but we can be sure it's not going to be a straight line between then and now," Mastracci said.
"Oil and gas investing is an area that will drive people nuts, it's not for the faint of heart".
Investors who already own the TSX/S&P in an exchange-traded fund or mutual fund are already heavily invested in the energy sector, since it represents more than a quarter of the index's value.
"If you have a bit of it already, you may not need more," Mastracci said.
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