The Revenge of Canadas Old Economy

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The Revenge of Canada's Old Economy

Tap Into the Oil Boom

Tap into the Oil Boom at a 15% Discount and Snatch Hefty Currency Gains to Boot

Canadian stocks have been on a bull run for the last four years and have hit new highs almost daily since last quarter. As a result, many Canadian equities sport stretched valuations. Yet, with fierce global demand for natural resources, the Canadian stock market has a lot of road yet to run. And perhaps the best opportunities in the market are in energy stocks.

Canadian energy stocks aren’t cheap, but that’s where you’ll see the best earnings growth over the next several years. The country’s strong fundamentals, vast oil resources and rising currency, make its energy sector an ideal place to invest this year. And the best oil investment you can make today, bar none, is the leading energy trust, Strategic Energy Fund. Let’s start with the big picture...

Canada’s Balance Sheet Outshines Other Industrial Nations
Canada holds the title for the best-performing G-7 economy since 2000. The country’s balance sheet now sets the standard for fiscal conservatism.

In April, the government cancelled two foreign bond sales planned for its 2006 fourth quarter after eight straight budget surpluses reduced the country’s borrowing requirements. Canada’s economy posted a whopping US$57.8 billion trade surplus over the last 12 months. Canada’s consumer price inflation is also low, at just over 2% a year. Wages, meanwhile, are growing at a benign 0.6%.

In stark contrast, the U.S. (recipient of over 85% of Canada’s exports) relies on foreign borrowing to the tune of US$3 billion per day to finance its bloated trade and budget deficits. Most other large industrialized economies also rely heavily on external funding to finance their spending needs.

Perhaps the most telling contrast is Australia, another commodity-linked export economy. Despite a resource-hungry Asia vying for Australia’s natural resources, Australia is approaching economic stagnation. Australia struggles with a US$12.8 billion trade-deficit, a sagging currency, rising inflation, and a sluggish real estate market.

With such strong fundamentals, it’s no wonder the Canadian dollar has soared since 2003. From its all-time low of C$1.62 to the U.S. dollar, it hit a 15-year high during the first quarter at C$1.129—a 30% gain. That trend could continue all the way to parity, where one Canadian dollar equals one U.S. dollar. Canada is simply a better alternative to the U.S. dollar this decade and should be in every diversified portfolio—along with gold, silver and the other precious metals.

The Perfect Storm for Energy Bulls
Two powerful forces literally guarantee a profitable outcome for energy investors the remainder of this decade:
• Declining global oil and gas production
• Rising geopolitical tensions

There’s no doubt Peak Oil has arrived. Peak Oil is the “Perfect Storm” for energy bulls because most large oil producers cannot replace their annual production or reserves. Over the last three years, energy goliaths Royal Dutch Shell, Repsol YPF and Statoil of Norway have warned of declining future production as companies struggle to replace their oil reserves. Many countries, including Mexico, Oman, Qatar, China, and the U.S. have already surpassed peak production and experience declining oil production.

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Unpredictable weather has affected higher oil and gas prices. Hurricane Katrina literally wiped out more than 25% of America’s domestic production last fall, paralyzing the Gulf of Mexico and costing oil companies billions to repair heavily damaged infrastructures. Last fall’s damage caused crude oil prices to hit a multi-decade high of US$70 a barrel, while natural gas prices leapt passed US$15 British Thermal Units (BTUs) in December. As weather patterns become more volatile coupled with the rising number of hurricanes in the Gulf of Mexico, you can expect production cutbacks later this decade.

But one variable that seems almost assured of cutting off oil supplies is the rising threat from unstable oil-producing regimes.

Increasingly, oil-producing nations are rewriting the terms of their energy agreements with foreign multinationals drilling in their country. Venezuela and Russia are two prime examples of governments forcing foreign oil producers to trim their profits by granting their government coffers higher margins from exploration. nd Russia, one of the largest bastions of oil and gas reserves after Saudi Arabia, is an unreliable energy source after their dramatic decision to cut off supplies to Ukraine and Belarus earlier this year.

The United Nations are also forcing Iran to reconsider its nuclear ambitions. Iran is a major oil-producing nation and a military conflict will send oil prices surging to US$100, or higher, overnight. Virtually all Middle East oil passes through the Strait of Hormuz, an oil basin heavily influenced by Iran’s coastal proximity and growing naval presence. The rising threat of “reliable oil” supplies don’t stop with just Iran, Venezuela, Nigeria, and Russia. Even Saudi Arabia, the world’s largest crude oil exporter, remains a politically fragmented nation with Muslim militants threatening to topple the regime.

The rising threat of “reliable oil” supplies don’t stop with just Iran, Venezuela, Nigeria, and Russia. Even Saudi Arabia, the world’s largest crude oil exporter, remains a politically fragmented nation with Muslim militants threatening to topple the regime.

The terrorist factor is yet another wildcard in a long series of unpredictable events potentially destabilizing a nervous oil market in 2006. Since 9/11, terrorists have knocked out installations in Saudi Arabia and Iraq, and threatened to damage other oil-producing facilities.

The bottom line is investors must own energy, not just because of the incredible supply and demand fundamentals favoring further bull market gains, but equally, as a hedge against geopolitical chaos. Oil is the most politicized commodity. As global tensions escalate, there’s no doubt energy prices will command an even greater premium before this decade is through

Buy Canada’s Best Energy Trust at a 15% Discount!

For many Canadian energy trust units, payout ratios should continue to rise. The exceptions include those trusts with earnings bias tied to natural gas. Spot gas prices have plunged 50% since their mid-December highs and unless the market recovers quickly, distributions are likely to be shaved for the entire sector.

The good news is trust units carrying conservative payout ratios should continue to distribute the same dividends this summer, provided crude oil prices remain high. And the best way to play Canada’s booming energy patch is to buy a diversified trust of trusts holding the best-managed Canadian oil companies.

The Strategic Energy Fund (TSX/SEF.UN) is an investment trust traded on the Toronto Stock Exchange that seeks to provide unit-holders with superior rates of return through a diversified portfolio of oil and gas royalty and income trusts. But unlike other trust-of-trusts, this gem also invests in early-stage energy companies or junior oil stocks supported by strong management and great capital gains potential. T his small allocation to junior energy stocks gives the trust an extra “kick” as the bull market rally heads into overdrive in 2006.

Portfolio manager, Glenn MacNeill, a 28-year veteran in the oil and gas industry, also holds several profitable energy services companies.

As of April 27, 2006, Strategic Energy Fund holds 66% in energy trusts; 11.9% in energy services trusts; 9% in utilities and infrastructure trusts; 6.6% in junior energy companies; and 6.5% in private issues.

The Strategic Energy Fund’s top ten holdings include Canada’s best energy trusts. Among these proven winners are Penn West Energy; Bonavista Energy; Progress Energy; ARC Energy; Vermillion Energy; Zargon Energy; Keyera Facilities Income Fund; Fairborne Energy; Peyto Energy; and Star- Point Energy Trust.

The Fund’s advisor, Sentry Select Capital, currently manages C$2 billion (US$1.7 billion) dollars in assets with 29% of its asset base invested in the Canadian energy sector. Combined with Glenn MacNeill’s experience and energy investment savvy, the Strategic Income Fund is a winner!

As of April 27, 2006, Strategic Energy Fund trades at a 14.9% discount to its net asset value of C$14.80 per trust. Why buy a basket of top-rated Canadian energy trusts at par value when a superb portfolio such as SEF trades at a double- digit discount?

Plus, the trust provides investors with a regular monthly payout or dividend, presently at C$0.11 per share, recently raised from C$0.10 in March. That’s an effective C$1.32 per annum or 10.6% per year! Compared to the average energy trust, which yields 8.4%, Strategic Energy Fund pays a 26% greater yield.

And consider this: Strategic Energy Fund now sells 15.2% off its 52-week high of C$14.98—a great entry point for new energy bulls.

The Strategic Energy Fund is also available for Dividend Reinvestment Plans (DRIP). Investors can start a DRIP program with as little as one share registered; once you’re on the company’s list of registered shareholders, you can ask for a DRIP registration form. With a DRIP, interest or dividend income is automatically reinvested back into your account—without commissions or brokerage fees! It’s the perfect long-term savings plan for retired investors or individuals seeking regular monthly income.

If I’m right about oil and growing geopolitical risk, the booming Canadian energy patch, the bull market for the Canadian dollar, and the powerful capital gains potential from Strategic Energy Fund and its rising monthly payout ratio, then you’ve got all the ingredients for a Grand Slam investment in Canada.

Eric Roseman is the Investment Director for The Sovereign Society as well as founder and editor of Global Mutual Fund Investor (GMFI), a monthly newsletter that highlights the world’s best managed offshore funds. Visit www.globalmutualfundinvestor.com for more information on GMFI.