Syncrude Awakening

By John Myers

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.  The one important difference between these two versions of crude oil is that Suncor’s 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…

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 find. 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.

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. United States (48 states) proven oil reserves peaked five years later in 1962 and have been diminishing ever since. The United States 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!

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 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, 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 had proven reserves of 1.5 billion barrels of oil equivalent (boe), up 26 percent 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.