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Oilsands Opportunities?

Richard Croft
February 27, 2011
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Despite the anxieties besetting the crude oil market, Canada’s energy sector, like its banks, appears to be doing just fine, thanks. Over the past month, the S&P/TSX Capped Energy Index is ahead about 7%, joining financials (ahead 6% in the past month) on the upswing, and helping keep the broader Composite buoyed nicely for the month.

That’s partially because some of Canada’s biggest energy players have very little exposure to Libyan production, including Canadian Natural Resources Ltd. (TSX: CNQ, Recent price $48.35), which has no operations in Libya at all. But even those with some exposure, like Suncor Energy Inc. (TSX: SU; $44.90, up 5.5% in the past month), with about 2% of its production coming from Libya, remain cushioned owing to rekindled interest in Canadian crude from south of the border. Cenovus Energy Inc. (TSX: CVE, $37.55), spin off from EnCana Corp. (TSX: ECA, $31.64) a little over a year ago, is said to be looking for partners to develop its oilsands properties.

With increasing volatility affecting Middle Eastern supply, US regulators have rediscovered the undeniable benefits of a large, stable source of crude oil just across the border. And that’s nothing but good news for pipeline juggernaut TransCanada Corp. (TSX: TRP, $38.49) and its proposed
3,200 kilometre Keystone XL pipeline that would carry 500,000 barrels per day of Canadian crude oil from Northern Alberta to US Gulf Coast terminals. TransCanada shares are up 5.5% in the past month as a result.

It is unlikely that the North African/Middle East political crisis will be resolved anytime soon. Indeed, students of history are essentially pessimists and learn that inevitably, revolutionary fervor gets worse before it gets better, and often brings a result opposite to that desired by ardent revolutionaries – the Iranian revolution that deposed the Shah is a good case in point. The result there was Ayatollah Khomeini, and we all know where that has led.

So it is, by extension, that Canadian energy issues might still have more upside left, even if propelled by broader sentiment in the commodity markets, which often has a way of infecting equities very quickly. Aggressive traders might consider bullish bets on some of Canada’s bigger, liquid energy players in hopes of some more truly lucrative leverage.

You might look at the Suncor, Canadian Natural Resources and Cenovus Energy as call buying opportunities. The SU Sept 46 calls at $3.65 look interesting, as do the CNQ August 50 calls at $3.25 and CVE Oct 38 calls at $3.10. With each of these trades, I would sell half my position if the option doubles in value. The idea is to take your costs off the table and hold the reminder for the possibility of more upside.

The strategy for TransCanada Corp. is a little different, as I think investors tend to buy this company for its steady cash flow and 4.39% dividend yield. With TRP, I would look at a covered call write, where you buy the stock and sell the October 40 calls at 85 cents.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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