U.S. investment strategist Jeffrey Saut is a big fan of Canada and its natural resources.
The Raymond James & Assoc. Senior vice-president, and chief economist is so fond of all things Canadian that he once told a Globe and Mail newspaper reporter that when the U.S. sent troops into Iraq back in 2003, it invaded the wrong country.
“We should have invaded Canada,’’ he said.
Six years later, Saut was slightly taken aback when reminded of the comment. It was actually a tongue in cheek reference to Canada’s developing oil sands in Alberta, and an investment thesis that aims to cash in on expectations of rising energy consumption after China joined the World Trade Organization in December, 2001.
“We stuck with that theme and have made a lot of money off of it over the past 10 years,’’ he said during a telephone interview from St. Petersburg, Fl.
But as he looks ahead to 2012 and beyond, Saut is confident that this thesis will continue to generate returns for investors as a growing middle class in India, China and other former third world countries spurs demand for everything from crude oil to cement.
“As per capita incomes keep rising, people consume more stuff,’’ he said. “[Income and consumption rates) may plateau for a year or two, but generally they tend to keep rising.’’
It’s not surprising, then, to hear Saut predict that unless the European Union implodes (and he doesn’t think it will), North American equity markets will trend “irregularly” higher in 2012. (The term irregular refers to his view that trading patterns will remain volatile and headline driven).
The outlook for oil, he says, depends on what happens in Iran. “I think there is a 50% chance that Israel could go in there and try to take out some of their nuclear facilities,’’ he said. “If they do that, I could see a dislocation because I think the Iranians would mine the [Strait of Hormuz] and I think the U.S. would have something to say about that.’’
“But barring a Black Swan [event] like that, I think the price of oil will stay around US$100 per barrel.”
Saut is also bullish on natural gas even though some of his colleagues in the Raymond James energy team have been bearish for the past year.
“The reason I’m bullish is because I talk to some very smart people in natural gas companies,” he said.
In making the call on natural gas, he is also mindful of recent transactions in the sector and the “disconnect” between current prices and what companies have been paying for assets.
“You saw Exxon Mobil Corp (NYSE: XOM, Stock Forum) overpay for XTO Energy Inc. You saw Atlas Energy get taken out at a premium. You also saw the Chinese doing a natural gas deal with Chesapeake Energy Corp. (NYSE: CHK, Stock Forum).”
(Exxon Mobil acquired XTO Energy in a $41 billion all-stock deal back in December 2009. Chevron Corp. (NYSE: CVX, Stock Forum) completed the $3.2 billion ($43.34 a share) acquisition of Atlas in February, 2011. In late January, 2011 China’s top offshore oil producer CNOOC Ltd. (GREY: CEOHF, Stock Forum) agreed to pay $1.3 billion to acquire a one third interest in Chesapeake shale assets in Colorado and Southeast Wyoming, and fund drilling and completion costs).
Saut says major players in the energy sector are buying for the long term and paying well above the market price for assets.
“You can’t really find a transaction for natural gas properties taking place at less than US$4.50 to US$5 per Mcf (thousand cubic feet),’’ he said. “Yet you have natural gas trading at around $3 Mcf. So there is a disconnect there somewhere.”
Saut’s top pick in the Alberta Oil sands is Cenovus Energy Inc. (TSX: T.CAN, Stock Forum) (NYSE: CVE, Stock Forum). He says this is because its Christina Lake and Foster Creek projects are two of the best properties in the region. “That would be my number one, two and three pick.”
Trading at $32.13 this week, Cenovus has a market cap of $24.21 billion, based on 753.5 million shares outstanding. The 52-week range is $39.98 and $28.85.
Linn Energy LLC (NASDAQ: LINE, Stock Forum), is a stock that Saut would buy for his own account.
“They are growing organically at better than 30%,’’ said Saut, who likes the fact that the company is equally weighted towards crude oil and natural gas. “They have hedged their prices for the next 15 to 16 months. They have one of the best management teams on the planet. Their average weighted cost of capital is 7%.”
Trading at $37.90 this week, the Houston, Texas, company has a market cap of $6.7 billion, based on 177 million shares outstanding. The 52-week range is $41.113 and $31.03.
Other companies on Saut’s radar screen include.
EV Energy Partners L.P. (NASDAQ: EVEP, Stock Forum). Trading at $65.24 this week, EV Energy has a market cap of $2.23 billion, based on 34.2 million shares/units outstanding. The 52-week range is $77.96 and $38.46. Saut says stock market valuations do not reflect the company’s interest in the Unita Shale in eastern Ohhi.
Gasfrac Energy Services Inc. (TSX: T.GFS, Stock Forum) Company has developed new fracturing technology that uses a flammable propane gel instead of water or oil-based fracking fluids to release trapped oil and gas from underground shale deposits. The process, which has yet to attract the attention of U.S. environmentalists, has been cleared by regulators in Canada. Trading at $6.86 this week, Gasfrac has a market cap of $427.2 million, based on 62 million shares outstanding. The 52-week range is $14.62 and $6.15.