Leaving the Gulf to look for strong energy stocks
In the wake of the Gulf oil spill saga, this U.S. advisory likes two energy stocks that should rebound, and reviews three Canadian income trusts.
Where do you go if you want to get away from the Gulf of Mexico?
If you follow the news, you can’t avoid it. Anxious hopes that the well has been plugged and ongoing barbs aimed at BP keep the issue boiling.
And if you’re an energy company — or an investor in energy stocks — where do you go to avoid the ill effects of BP’s massive oil spill?
Last Friday, we examined the Gulf oil spill through the eyes of a British advisory that still believes in BP as a strong long-term investment (see Daily Buy-Sell Adviser, July 16).
Today we look at two energy stocks that are trying to keep a safe distance between themselves and the Gulf disaster. One is American giant Chevron (NYSE-CVX). The other is Italian megafirm Eni (NYSE-E).
Both stocks are in the Income Portfolio of a leading U.S. advisory, Personal Finance. Both have had their share prices “sucked in” by the downward spiral created in the wake of the Gulf spill.
Yet both can entice investors with high dividend yields and profitable projects far from the Gulf, notes Mr. Roger S. Conrad for the advisory.
Before we follow these two “Super Oils” across the globe, we will take the opportunity to review the three Canadian income trusts in this portfolio.
August distributions
As we have remarked on several occasions, Mr. Conrad may be America’s leading expert on Canadian investments. Thus his word carries extra weight with American investors seeking to diversify away from a strict diet of U.S. stocks. Like with these Canadian trusts.
Canada’s foremost apartment landlord, Canadian Apartment Properties REIT (TSX-CAR.UN; OTC-CDPYF) has been in this portfolio for almost five years. Mr. Conrad has a target price of US$15. The units are trading at $14.87 on the Over the Counter board in New York.
In Toronto, the price is $15.53 and yields a rich 7 per cent on the $1.08 distribution.
An even longer resident of this portfolio is Vermilion Energy Trust (TSX-VET.UN; OTC-VETMF), which has been on board since 2004. Last week, this oil and gas trust announced a $0.19 distribution for August.
It’s a buy to US$35, says the analyst. The price in New York is $32.84. The units trade at $33.18 on the TSX and yield 6.8 per cent on the current distribution of $2.28.
Mr. Conrad has stuck by Yellow Pages Income Fund (TSX-YLO.UN; OTC-YLWPF) through thick and a certain amount of thin. It’s been in this portfolio since 2005.
Yellow Pages, which also confirmed its August distribution, is a buy up to US$8 for the advisory. It’s at $5.66 in New York and $5.91 in Toronto, yielding a whopping 13.5 per cent on the $0.80 distribution.
Far overseas
It’s not entirely clear what restrictions will surface for offshore drillers in the United States. But while that battle goes on, there is bound to be an advantage for companies that can drill elsewhere.
Chevron has some interests in the Gulf. But its biggest deepwater drilling projects are overseas. Far overseas, as in the Black Sea.
The company is working out a US$33 billion partnership with Rosneft of Russia to develop “massive reserves” beneath the Black Sea. It’s also bidding on drilling rights in the South China Sea (in concert with BP, interestingly enough) and off the African coast.
It seems highly unlikely that any of these jurisdictions are liable to be particularly prickly about drilling restrictions.
As an Italian company, Eni is overseas by definition. But it, too, is adding to its international portfolio.
Eni is building on its relationship with Russia’s natural gas giant, Gazprom. It already has interests in nations that have not always been friendly to Anglo-American companies, like Libya and Venezuela.
In addition, Eni is spending US$1 billion a year to increase production at Iraq’s Zubair field.
Guilt by association
In the past, many such foreign oilfields were looked at suspiciously due to their so-called “political risk.” At least temporarily, the greater political risk appears to be off the shores of North America.
In the meantime, the shares of both Chevron and Eni have fallen off considerably. Since the price of oil has not plummeted, the low valuations of these stocks “can only be attributed to one thing,” says Mr. Conrad, “guilt by association with BP and the Macondo disaster.”
The market’s confusion, he adds, is your opportunity to accumulate these stocks at lower prices — and attractive yields.
Chevron is trading at $72.78, some $11 dollars beneath its May high. The shares yield 4 per cent on the $2.88 dividend.
Eni is at US$39.88, about $15 off its December high, and yields a sturdy 6.3 per cent on a dividend of $2.45.
Many investors are nervous about oil companies (and indeed, about income trusts) these days. But in this analyst’s opinion, that simply opens up handsome opportunities for those who look beyond today’s headlines.
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