Make Some Loonie Profits With These Canadian Stocks
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In May of this year, the Energy Information Administration released a report updating US dependence on foreign oil. The statistics confirm that the United States is becoming increasingly energy independent with only 40% of total petroleum and oil coming from foreign countries.
Of that 40%, more than half is imported from the Western hemisphere, mostly from Canada, which accounts for 28% of total net imports. This makes Canada the USA's largest crude oil and petroleum trading partner, well ahead of Saudi Arabia at 13%.
Information courtesy of the EIA. Chart produced by author.
With a stable political climate, favorable business environment, and accessibility to the US markets, Canadian oil is poised to supply greater amounts to a seemingly insatiable appetite south of the border.
A cow town oil company
Suncor Energy (NYSE: SU) could be the biggest winner as a result of this burgeoning relationship. As astute investors know, Suncor is invested heavily in the Canadian oil sands. In fact, during Q1 2013, oil sands production contributed 357,800 barrels/day (bbls/d) of the total 596,100 barrels of oil equivalent/day (boe/d). That's a significant increase compared to the 305,700 bbls/d the oil sands contributed just one year earlier.
As productivity rises, margins are improving. Cash operating costs per barrel for oil sands operations decreased in Q1 2013, averaging $34.80 per barrel compared to $38.10 per barrel in Q1 2012.
As efficiency in these operations continues, profitability will increase. This is especially true given the stable EIA crude oil projections, which predict low $90 oil through 2014. Suncor used $85 oil for its own guidance.
Perhaps a concentrated oil play isn't suitable for your low-risk portfolio due to the volatility of that commodity over the last decade? Then you might want to consider an energy transporter, which will benefit from steadily increasing demand and should remain more insulated to moderate price changes.
Enbridge (NYSE: ENB) is a pipeline play that transports NGL's, crude oil, and refined petroleum products all over Canada and the USA.
Over the last three weeks, Enbridge has been hit by an almost 8% drop from its all-time highs. This pullback could be a solid buying opportunity for the patient long-term investor.
Enbridge has been a historic out-performer compared to long-term industry averages. The average five-year net profit margin for Enbridge is 6.9% versus the industry average of 6.4% over that same period. The average five-year Return on Assets (ROA) comes in at 3.7% compared to the industry five-year average of 3.4%. Finally, the five-year Return on Investments (ROI) registers at 5.3% vs the 4.8% five-year industry average.
One final note about the future of this company. Looking over the 2012 annual report and Q1 2013 results, I got an overwhelming sense of bullish times ahead. I wondered if I was alone in this impression so I looked to other analysts for their insights. It appears that my initial thoughts were right on the money.
Analysts are looking for almost 20% gains in earnings for 2014 versus the estimates for 2013. If true, this could take Enbridge from a P/E of 56 to 20 in just one year. With an industry average P/E of 42.7 and Enbridge historically trading at a premium to that figure, it appears that stock price appreciation is on the horizon once these earnings manifest.
Expansion is the key to driving these future earnings. Currently Enbridge has 33 projects under development and they are all on time or ahead of schedule. The recent acquisition of the Seaway Pipeline coupled with future expansions will reach to Houston. These acquisitions come without the baggage of a politically charged projects like the Keystone XL Pipeline, which as Enbridge found out with the Northern Gateway Pipeline in British Columbia, can be a costly and time consuming.
Enbridge remains focused on profitable projects that provide access to under-served or bottle-necked areas such as the Canadian oil sands. This in turn will add significant shareholder value over the long run as these resources become more profitable for companies like Suncor to exploit.
TransCanada (NYSE: TRP) is my top pick in the Canadian energy space. It operates pipelines that transport both natural gas and oil. It also owns and operates power generation facilities, markets and trades electricity, and maintains storage facilities.
Recently, TransCanada has seen a 7% pullback in stock price from its all-time highs. Just like Enbridge, this could be the move that patient value investors have been waiting for to initiate or add to a position.
Two factors that make this my top pick would be the industry leading profit margins and the yield that continues to steadily increase.
The most recent year saw a net profit margin of 23.2%. Compare that to the industry average of approximately 0.1% and it's easy to see why I favor this stock. But this year was no fluke. Looking at the five-year average net profit, we find TransCanada sporting a healthy 16.9 versus an industry average of 8.2%.
The 4% yield is attractive and dividend increases over the years have been consistent. With a 91% payout ratio, some might be concerned about the future of increases. But with a low long-term debt/equity of 1.2, analysts forecast a 10% rise in earnings for 2014. And with relatively little capital expenditures projected for infrastructure maintenance, these dividend increases should continue unabated.
Expansion is the key for TransCanada's future growth. More than $25 billion in investments are expected to become operational from now through 2016, all secured by long-term contracts. It also has interests in the Keystone XL Pipeline, Keystone Pipeline, and the Gulf Coast Project in the United states.
Realizing the importance of natural gas, of which Canada is a growing producer, TransCanada is constructing a key gas pipeline and terminal for exports in Prince Rupert. This is projected to have an initial capacity of 2 billion cubic feet/ day (Bcf/d).
TransCanada has many desirable characteristics going forward; the stability of a utility company due to it's power generation and transmission segment, the expansion possibilities of pipelines for increasing revenue, and finally, it is a highly profitable company with an attractive dividend.
With Canada poised to import more oil into the energy-hungry United States, certain companies will benefit. The oil sands represent great potential but remain largely undeveloped. Suncor Energy seeks to change that with its increasing and successful exploitation of these resources. If safety is your goal, then a pipeline company like Enbridge could be the best way to participate in this growth with minimal risk. Finally, for those who think Canadian energy in general has a great future, TransCanada has interests in all key areas and pays a great dividend.
With three different ways to play this burgeoning sector, there is no excuse for any investor to be left behind.
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James Catlin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!