Backyard Oil

America is a nation of privilege – most of us don’t worry about where our next glass of water will come from, where our next meal will come from or where our next gallon of gasoline will come from. We roll out of bed every morning, comfortable that sufficient supplies of water, food and fuel await our personal demand.

More than likely, our complacent comfort is secure with respect to food and water, both of which are “homegrown”. But our supplies of crude oil are less reliable. Since homegrown sources of hydrocarbons are satisfying less and less of our domestic energy needs, we must rely more and more on foreign sources. All else being equal, domestic is better.

In a world of increasingly volatile geopolitical tensions, Outstanding Investments has argued for months that domestic supplies of oil and gas will become increasingly vital to the well-being of the U.S. economy. That’s why we recommend stocks like Suncor Energy, a company that literally “mines” oil from tar sands in Alberta, Canada. Despite the unusual geological nature of Suncor’s reserves, it’s “syncrude” refines into gasoline and jet fuel just as well as Saudi oil.

Athabasca Oil Sands: Considerable Reserves

The one important difference between these two versions of crude oil is that Suncor sits right next door in Canada, not halfway around the world in the middle of the Arabian geopolitical tinderbox. What’s more, Suncor’s reserves are considerable.

The Athabasca Oil Sands, where Suncor runs its operation, is the largest of these oil sands deposits. It contains over one trillion barrels of bitumen on its own, although only about 300 billion barrels of bitumen can be recovered using current methods of mining. By comparison, Alberta’s conventional oil reserves are currently estimated at about 4.5 billion barrels of oil. Even more significantly, the Athabasca Oil Sands contain more oil than all the known reserves in Saudi Arabia.

Suncor is but one example, albeit a very unique one, of a company possessing large North American oil reserves. Finding companies with domestic oil reserves isn’t too difficult, but finding companies with considerable and/or growing reserves is very difficult indeed.

Here’s why: North America has been “drilled out”, and substantial finds have become virtually impossible to discover. By next year, humanity will have consumed about half the oil that the world holds under its crust. Of the ‘yet-to-find oil’, pegged at around 150 billion barrels – half is estimated to rest beneath the sand of just five Middle East countries: Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates.

Athabasca Oil Sands: More than the Rest of the World Combines

By contrast, much of the “already-found-and-consumed” oil came out of the ground right here in the US. More exploratory holes have been drilled in the continental United States than in the rest of the world combined. The United States (48 states) oil discovery rate hit its maximum in 1957 and has since decreased. Proven US (48 states) oil reserves peaked five years later, in 1962, and have been diminishing ever since. The US oil production rate reached its peak in 1970 and has also been declining ever since. For this reason, the United States now relies on foreign sources for more than half of the oil it consumes. This is a number that will continue to grow.

America’s increasing reliance on foreign supplies is a certainty, especially since the U.S. Senate recently rejected proposed oil drilling in the Alaskan National Wildlife Refuge. But the more we must rely upon foreign oil, the greater the appeal of a company like Suncor, which is sitting on vast domestic reserves.

Because high-quality companies in the oil stock sector have been lagging behind the strong rallies in both oil and gas, we think the timing has never been better to snap up the shares of companies with large North American reserves.

As my colleague, and occasional Outstanding Investments contributor Andrew Kashdan pointed out recently, “Very few resource stocks have kept pace with their related commodities. And that bizarre divergence may present a terrific investment opportunity, even for the most cautious of commodity bulls”.

For example, natural gas prices have soared more than 260% over the past year and a half. Amazingly, however, the XNG Index of natural gas stocks – which consists of 15 major gas producers, including Anadarko – has actually declined by more than 8% over the same period!

“A temporary pullback in natural gas prices would hardly be surprising, given the spectacular recent rallies,” Kashdan surmises. “But we think that the natural gas bull market is the ‘real deal’. Therefore, we suspect that the shares of many natural gas companies are too cheap because they are pricing in a worst-case scenario that is highly unlikely to occur.”

Athabasca Oil Sands: Supply and Demand

Furthermore, supply and demand trends in the natural gas sector are extremely bullish for gas prices. On the supply side, total U.S. gas production volumes were down about 5% in 2002 and could be down again this year. Natural gas in storage is nearly 50% lower than it was a year ago. A cold winter has supported prices, but we think they will remain firm even after seasonal demand declines. All in all, APC should be realizing very high prices for its natural gas this year, and a boost in earnings and cash flow will be close behind.

Over the last few months, we have tipped off our Outstanding Investments subscribers to several opportunities in the North American oil and gas sector. One example is Petro-Canada, a company that is set to become Canada’s largest petroleum producer.

Petro-Canada is likely to increase output of crude oil by 48% this year to about 364,000 barrels of oil per day on average. Including natural gas, production should exceed 500,000 boe (barrels-of-oil equivalent) per day. This increase is double the average growth rate of Canada’s top five oil companies and puts Petro-Canada ahead of its two main rivals Imperial Oil Ltd. (a unit of Exxon Mobil) and Shell Canada Ltd. (Royal Dutch/Shell Group).

Talisman Energy is a different sort of play on domestic oil. The company recently unloaded its problematic oil properties in the Sudan, looking to re-focus its efforts on properties back home in North America.

The core truth about Talisman is this: the company is rich in oil and gas reserves. At the beginning of 2002, Talisman held proven reserves of 1.5 billion boe, up 26% from the year before. And the lion’s share of it is tucked safely beneath the Western Canadian foothills and prairies.

When it comes to investing in energy companies, we strongly believe that there’s no place like home.


John Myers,
for The Daily Reckoning
April 3, 2003


The entire world economy rests on the consumer; if he ever stops spending money he doesn’t have on things he doesn’t need – we’re done for.

For many years now, he’s gone beyond the call of duty. Implored by Fed governor Robert McTeer to “buy an SUV… preferably a Navigator…,” and lured by zero percent financing, he bought one…and one for his wife too! On credit, of course. Tempted by the Fed’s lower rates…he also bought a new house…and refinanced it twice.

What more can you ask of the guy? And now, says, economist Allen Sinai, the poor consumer is “caving in.”

What the consumer was doing – in economic-speak – was “dissaving”. Instead of saving, he was spending, in other words. But recently, the spending seems to be trailing off. It is not that the consumer is willfully shirking his duty to sacrifice his own finances for the homeland and its central bankers. He just has no more savings to dis.

Heat, utilities, water, gas, housing, property taxes, health care, insurance, college tuition and many other expenses keep going up. Energy expenses rose 22% in the last 12 months. Medical costs were up 4.5%. Transportation increased 7.1%.

Last time the Department of Labor Statistics looked, GDP was still rising. But, as the Mogambo Guru says, “who gives a rat’s patootie about GDP?…And don’t give me that crap that health insurance and mortgage payments and food come out of discretionary income. Let me miss one damn payment and then we’ll see how ‘discretionary’ those payments are!”

Mogambo doesn’t seem to be in a spending mood. Nor are most of America’s consumers. In fact, more and more consumers are finding it hard to continue spending at all.

From the Rockies comes news that home foreclosures rose 36% in Denver in the first quarter, compared to 12 months ago. Bankruptcies rose 26% in the state of Colorado.

And now the war! Only 13 days into it, and consumer sales have dropped…manufacturing is down…consumer confidence is falling…and auto sales slumped in the month of March.

But who knows? Maybe a quick victory and another rate cut will still bring out the spenders again. Maybe they’ll wave refi contracts at the victory parade and then dissave themselves into an even deeper hole.

Eric? Your news?


Eric Fry in New York…

– The stock market is less a market of stocks these days than an Iraqi War call option. As the coalition forces advance toward Baghdad klick-by-klick, the stock market advances uptick-by-uptick. Yesterday, the Dow Jones Industrial Average soared 215 points to 8,285, while the Nasdaq Composite added 3.6% to 1,397.

– Now that the sweet smell of near-victory fills the air – a smell that is quite different from chemical gas – investors have no more use for safe-haven assets like gold. Most folks are probably wondering why they bought the stuff in the first place. In the eyes of many investors, gold must now seem more like a frivolous yard-sale “bargain” than a timeless store of value. The yellow metal tumbled $4.80 yesterday to $330.40 an ounce. Government bonds also fell from favor. The benchmark 10-year Treasury note tumbled 30/32, pushing its yield to 3.99% from 3.93% the day before.

– We assume that the nation’s economic difficulties did not disappear yesterday, but simply receded into the background, as investors cheered our military successes. Perhaps denial is the prudent course of action. Maybe, as the bulls predict, a swift victory in Iraq will bestow a multitude of blessings upon our struggling economy, and lift us out of the “soft patch” that Chairman Greenspan has been bemoaning. Maybe military success will, in fact, prove to be a sort of elixir that cures whatever ails the economy and the stock market.

– Alternatively, the Iraqi campaign, even if it succeeds swiftly, might pluck our economy out of its soft patch, only to shove it between a rock and a hard place. In which case, buying expensive stocks would prove to be no more rewarding in April of 2003 than it has been in earlier epochs. We suspect that yesterday’s stock market rally was nothing more than the latest temporary respite from our long-running bear market.

– It would be nice if a costly foreign war could, in fact, cure most of what ails our economy, while also boosting the stock market. But wishes are the stuff dreams are made of, not sustainable stock market rallies.

– Here’s some troubling news for all those Wall Street strategists who stake their bullish outlook on the statistical improbability of four straight losing years in the stock market: Japanese land prices declined for the 12th straight year in 2002, sending the average commercial real estate prices down near late-1970s levels. Likewise, the Japanese Nikkei is into the 13th year of its bear market…and has tumbled to a 20-year low.

– The Japanese experience illustrates an immutable law of financial markets: mean reversion. In other words, what goes up, valuation-wise, must come down.

– The fact that stock prices would fall in order to correct a prior excess is not improbable at all…It is a certainty. Wasn’t the bubble itself an improbability of epic proportion? Ironically, the same folks who point to the statistical improbability of four straight losing years, conveniently ignore the statistical improbability of the massive bubble that preceded the last three losing years.

– “So blame currently falling stock prices on previously rising stock prices,” says Grant. And if the previously rising prices had been rising for a long time, the currently falling prices might continue falling for a long while.

– “By some standards, the three-year decline in the stock market is a mere bear cub,” says Bloomberg News. “How about 13 years, as seen in the Japanese bear market from 1990 to 2003 that is still on the prowl? Or 16 years, as occurred in the U.S. market from 1966 to 1982? Or 20 years, the span of the U.S. slump from 1929 to 1949?”

– Is it not true that the higher a rocket soars into the sky, the farther it must fall when returning to earth? The return trip to “fair value” takes as long as it takes – no more, no less. A stock market that falls from a high altitude must fall for a long time to land on the terra firma of “fair value”.

– How long does it take? As long as it takes. The market does not follow a predetermined “timetable.”


Bill Bonner, back in Paris…

*** “I was supposed to go to New York next month,” Maria began at dinner last night. “But I talked to my agent and he said the city was quiet. People aren’t really doing very much because of the war. So, I don’t think I want to go over there. What’s the point? Besides, with this new Hong Kong flu, or whatever it is, I don’t want to get on a plane.”

Our conversation took place in a restaurant near the Palais Royal. Normally crowded with American tourists, the place was half-empty…the only tourists were one couple whose accent sounded South African and several groups of Japanese.

War…pestilence…need we mention, dear reader, that the world economy depends upon globalized trade…which depends on more than just the American consumer’s imprudence? People have to be willing to get on airplanes. And go into shops. Hong Kong is described in this morning’s press as a “ghost town”…”dead”…”silent”.

*** “The antique market is dead, too,” said a friend in the business. “For the last several years the Paris market has depended on Americans. Decorators from New York and LA come to Paris to buy for their clients. But they’re not here now. I don’t know, maybe they’re afraid because of the war….but it’s very quiet.”

*** Jules, 15, is fed up with the French educational system. He applied to several boarding schools in America and was accepted by two of them. But now, the moment of decision has come. He must tell the schools whether he is coming.

His parents are worried. They prefer to have him near at hand, where they can keep an eye on him. And his father thinks that such schools are a waste of money – a form of conspicuous consumption, like paying $2,400 for a handbag on Worth Avenue…or $100 for a bottle of wine at the Tour d’Argent. Not that the old man is unwilling to waste money…it’s just that he doesn’t like feeling like a schmuck.

“It’s not the money, it’s the principle of the thing,” he tells his son. But at $30,000 per year, he’s not sure.

Neither love nor money may have the final word. “With a war going on…and a plague spreading…do we really want Jules 5,000 miles away from home?” the parents ask themselves.

For little reasons and big ones, the world economy hesitates…

*** Zut alors! They announced a ‘social movement’ on the subway this morning. What they meant was that SNCF workers had gone on strike, and commuters would have to find a different way to get to work. So, we took to the streets. And what a glorious thing it turned out to be. A beautiful April morning…and an hour’s walk to the office. The trees are setting out leaves. The air is fresh and clear. Birds sing. Horns honk. Mothers walk their children to school. The smell of this morning’s bread and diesel fumes is in the air.

Ahhh…may the subway workers go on strike every day!

The Daily Reckoning