No Respect

America is rapidly running out of oil and gas reserves. But Canada is loaded with the stuff. So why do Canadian oil and gas stocks “get no respect” in the stock market?

Why do they, in general, sell for lower valuations than their U.S. counterparts? Maybe it’s just a bad habit. But we think this is a habit that is about to be broken, as Canada’s oil and gas companies step in to supply an ever- growing share of America’s energy needs.

A rapidly expanding pipeline network will facilitate oil and gas deliveries from Canada’s distant fields to an energy-thirsty U.S.. This pipeline network is just part of the reason why we expect Canadian stocks to “re-price” in line with American energy stocks over the next couple of years. First, a few important facts:

* The United States imports more crude oil and petroleum products from Canada than from any other country.

* Canada has proven conventional oil reserves of 4.9 billion barrels, as of January 2002. Oil production averaged 2.9 million barrels per day (bbl/d) during 2002.

Canada’s Oil Pipelines: Oil Sands

* And here’s the sexiest part of the Canadian oil story – Canada holds between 1.7 and 2.5 trillion barrels of oil sands! Unlike conventional crude oil, oil sands contain a mixture of bitumen, sand, water and clay. Bitumen, which is a thick and tar-like hydrocarbon, surrounds the sand and water.

To develop oil sands, bitumen is separated from the sand, water and clay. Once separated, bitumen can be upgraded into a high-quality oil called “synthetic crude.” The Athabasca Oil Sands deposit, in northern Alberta, is one of the two largest oil sands deposits in the world (the other is in the Orinoco Belt, Venezuela). There are also oil sands deposits on Melville Island, in the Canadian Arctic, and there are three smaller deposits in northern Alberta.

Current output of synthetic crude and bitumen is estimated at 600,000 bbl/d. A new oil sands project, the Muskeg River Mine, located on the Athabasca oil sands and operated by Shell Canada, Western Oil Sands and Chevron Canada, is scheduled to begin production in early 2003. The Muskeg River mine will produce an additional 155,000 bbl/d. Construction is also nearing completion at Petro-Canada’s MacKay River oil sands project.

Petro-Canada expects production of 30,000 bbl/d in 2003. According to the Canadian government, synthetic oil and bitumen production is expected to reach 1.2 million bbl/d by 2010.

Canada’s Oil Pipelines: Growing Pipeline Network

But this is merely the beginning of the exciting Canadian oil story. It “ends” at several pipeline hubs across North America…and that’s a great story all by itself.

Canada’s growing pipeline network may well be a boon to the country’s oil and gas production, as well as an important catalyst for revaluing Canadian energy stocks in line with American energy stocks.

Although most Canadian oil is produced in western Canada (mainly Alberta), oil is consumed primarily in central and eastern Canada. As a result, Canada exports mostly crude oil from Alberta and imports crude oil and petroleum products on the east coast, explaining why Canada exports approximately 1.89 million bbl/d (gross) to the United States, but net exports are slightly lower (1.78 million bbl/d).

An extensive pipeline system transports western oil to eastern Canadian and U.S. markets. There are two major pipeline networks. The first is Enbridge Pipelines Inc., an 8,700-mile network of piping and terminals, delivering oil from Edmonton, Alberta, east to Montreal, Quebec and eastern Canada as well as the U.S. Great Lakes region.

Enbridge is one of the largest crude oil and petroleum liquids pipeline systems in the Western Hemisphere, and the company is currently expanding its U.S. export capacity through its three-phase Terrace Expansion program. The other major pipeline system is the Trans Mountain Pipe Line (TMPL) system, which delivers oil mainly from Alberta west to refineries and terminals in the Vancouver, British Columbia area, as well as to the Puget Sound area of Washington State.

Canada’s Oil Pipelines: The Corridor Pipeline

Development of Alberta’s massive oil sands has necessitated new pipelines to transport diluted bitumen from the mine to downstream processors and eventually to market terminals. Most recently, Canadian pipeline companies have focused on taking the Athabasca oil sands southward to processing facilities in the Edmonton area. This is one of the primary operations of the Enbridge network.

Construction of another similar pipeline, the Corridor Pipeline (TransMountain) connects the nearly completed Muskeg River Mine (Shell Canada, Chevron Canada, Western Oil Sands) to Shell’s Scotford Refinery, located in the Edmonton area, near market terminals. The company expects oil to begin flowing through the Corridor Pipeline this year.

In January 2002, BC Gas announced that it intends to build a new pipeline in conjunction with TransMountain, called the Bison Pipeline, to transport diluted bitumen from mines and refineries near Fort McMurray to pipelines and processing plants in the Edmonton area. The Bison Pipeline would cover about 320 miles and cost about $625 million. BC Gas predicts that if regulatory approval is granted in early 2003, the pipeline could come on-stream by 2005.

Canada’s Oil Pipelines: Natural Gas Interconnections

There has been considerable progress in recent years on natural gas interconnections between Canada and the United States. The $2.5 billion Alliance Pipeline, at 1,875 miles, is the longest pipeline ever built in North America. Alliance is designed to carry about 1.3 billion cubic feet per day (Bcf/d) of natural gas from western Canada (Fort St. John, British Columbia) to the Chicago area. The pipeline entered into commercial service on December 1, 2000.

The Maritimes and Northeast Pipeline (M&NE) came on-stream in January 2000. M&NE is designed to deliver natural gas from Canada’s Sable Island area to New England. The pipeline currently is in the midst of two expansion projects. Construction is underway on Phase III expansion, which will extend the pipeline further into Massachusetts, connecting it with the U.S. Algonquin pipeline system in 2003.

In every area, from exploration to oil sands development and pipeline expansion, Canada is a growing energy market with a built in buyer – the United States. This is especially true in light of the development of the Oil Sands project and the expansion of oil and gas pipelines reaching into America.

The country will certainly be – if, indeed, it is not yet so – one of the most important global energy players in the years to come.

Sincerely,

John Myers,
for The Daily Reckoning
June 11, 2003

P.S. Canada’s oil and gas companies are still largely under-priced compared to their U.S. counterparts. Yet the Canadian companies have greater potential for bringing in large oil and gas field than U.S. drilling the lower 48 states. It all adds up to one thing – buy Canada Dry.

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The showdown continued in Paris yesterday.

About 1PM we heard the sound of whistles and drums…and then a voice on a megaphone. Demonstrators – protesting the government’s plan to curtail public pensions – marched up the rue de Rivoli towards the Place de la Concorde. “Save our retirement,” said some banners. “Keep your promises,” said others. (Another group of protesters were shouting “No more war,” but we couldn’t figure out what that had to do with the rally.)

“What’s really at stake,” explained a friend in the office, “is the unions’ power. The changes the government is proposing are very modest. The big unions already negotiated with the government and accepted them. These are just the hold-outs.”

Hold-outs or no, it took the next 3 hours for the crowds to pass our office. But the subject of today’s note is not politics, but bonds…about which we offer both a recommendation and a forecast.

Every great fraud begins with wishful thinking and ends in disgrace. Democracy, paper money, bull markets – all start out well enough. People are restrained, at first, by habits, memories and constitutions. But after a while, these are as forgotten as parents, and the fun can begin.

Surely the Fed enjoyed issuing trillions of dollars…money it created ‘out of thin air’; it made Alan Greenspan the most popular central banker since John Law. And almost every Western democracy got a kick out of making promises it couldn’t keep.

Now, France struggles to lower expectations; the bills are coming due and the French know they can’t pay them.

On the other side of the Atlantic, a recent Treasury study found the nation $44 trillion in the hole. Still, the promises get bigger by the day. The Bush Administration now pledges to make the entire world safe for democracy…and cut taxes, too!

This is the same administration of the same government whose Treasury bonds are now the rage on Wall Street. Both professionals and lumpen love them. Buying bonds, they believe, is safe. Many believe they are ‘guaranteed.’

A forecast: sooner or later, they will find out otherwise.

Our recommendation will come tomorrow.

Eric?

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Eric Fry on Wall Street…

– The puppy love phase continues on Wall Street…The stock market can do no wrong, in the eyes of most investors. But what’s this?…Bonds can do no wrong either? What sort of bizarre, three-way puppy love is this? How can investors love both stocks and bonds at the same time?…It just ain’t natural!…

– Yesterday, the Dow gained 75 points to 9,055, while the Nasdaq Composite jumped 1.5% to 1,628. Tech stocks led the charge, as usual, despite the news that Nokia is not selling as many cell phones as it would like. But warnings about lousy sales are as common in the tech sector as soaring share prices. Happily for investors, non-existent sales growth is no impediment to high-flying share prices.

– Gateway Computer was one of the tech sector’s stand-out performers yesterday, gaining another 10% on the day. Shares of the resurgent PC-maker have jumped an astonishing 64% since Apogee Research recommended buying them a couple of months back.

– I am delighted, of course, to see Apogee’s subscribers make money, (after all, I help out the team at Apogee). But the stellar performance of Gateway shares is also a little unnerving – the company’s operating profile has improved only a little over the last two months, while the company’s stock price has improved a lot!…

– If hope and expectation – rather than any actual operating improvements – have been driving the recent stock market rally, what will drive U.S. share prices higher from this point? More hope and expectation?

– “The speculators are back to joy-riding stocks via their keyboards,” Barron’s reports, “as online trading volumes have swelled in recent weeks. Online brokers reportedly saw retail trading activity up 25%-30% in May over April, which itself showed a nice jump off a low base in March. Nasdaq volume, no coincidence, rose more than 20% last month.”

– Meanwhile, the bond market continues to rally as if the economy is about to curl up in a ball and take a 10-year nap. The 10-year Treasury note soared yet again yesterday, pushing its yield down to 3.19% – ever closer to the unthinkable, Japan-style yield of 2.99%.

– One of these two financial markets – either the Nasdaq or the bond market – would appear to “have it wrong.” If the US economy is on the rebound, interest rates should be rising, not falling. On the other hand, if the economy is still mired in a recessionary, deflationary bog, then the stock market should be slumping, not soaring. Something isn’t right with this picture.

– The simultaneous stock/bond rally is a financial marvel for many reasons, not the least of which is the fact that energy prices remain stubbornly high…and rising. This trend imposes a de facto “energy tax” on American enterprise, while also squeezing profit margins. In other words, rising energy prices aren’t a good thing for corporate profits…and neither are they a heaven-sent gift for the bond market. Rising energy prices, all else being equal, contribute to rising consumer prices, which, all else being equal, contribute to MUCH lower bond prices.

– But the bulls on Wall Street rarely contemplate such troubling thoughts. They amuse themselves, instead, with happy thoughts of ever-rising stock and bond prices. They don’t worry about the fact that corporate revenues are not growing, that energy prices are rising, that the dollar is falling or that a housing boom is the only thing holding up the economy.

– The bulls assure us that the stock market “senses” a recovery six to nine months off, which is comforting news, because the economy continues to struggle mightily in the here and now. We’re sure glad that our economic problems are almost over, cause that means the bear market in stocks is absolutely, positively over…and a new bull market has begun. Even so, it may be a while before the Nasdaq revisits 5,000…

– “It has now been over 830 trading days since a new all- time stock market high,” observes Dr. James W. Paulsen, Chief Investment Strategist of Wells Capital Management. “It seems like the wait has been forever – but alas, it is only the seventh longest wait since 1900.”

– Pull up a chair…this may take a while.

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Bill Bonner, back in the City of Strikes…

*** Here’s a small housekeeping note: If you haven’t reserved your place at the Agora Wealth Symposium, better do it soon.