Saturday, October 7, 2017

With Canada East and Northern Gateway dead, I suggest you invest in pipeline companies for the next oil boom

As an investor, I always look for plausible scenarios. Here is one:  With a new charismatic NDP leader; a contentious tax bill in its midterm and a probable recession during the next election, the liberal government is likely a one term phenomenon. So is, for other reasons, Alberta’s NDP government.  Here is another scenario:  With Canada East and Northern Gateway dead, Canadian Pipeline companies will have a strangle hold on oil and gas transportation, especially during the next oil boom.  The Big Losers will be BC and Eastern Canada.   With limited pipeline capacity, pipeline companies control the toll they will charge for getting oil and gas to the east.  Now and in the foreseeable future oil and gas will be send to the U.S.  In the meantime, B.C.’s and Ontario’s economies are greatly benefitting from the current real estate boom which will likely come to an end. They’re pricing themselves out-of-the-market.  Unaffordable housing and their red tape for new building projects will ultimately slow down their economic activity which largely depends on construction. Excessive environmental regulation and boondoggle renewable electricity will make these provinces less competitive for manufacturing and high tech.

These are scenarios for possible economic futures. Will this happen?  Who knows. As an investor we may try to figure out if these scenarios are realistic.  Then you can choose what businesses and other assets to invest in.  For me, the cyclicity of oil and gas is notorious and a repeating pattern.  For me it is not a question about whether the oil and gas boom returns but about when it returns. My guess, within a year or two. Some real bulls talk already about $500 oil; for me, I am happy with $70 per barrel.  Really if oil prices would reach $70 we would boom again, but the demand for drilling and completion rigs and crews would also go up and along with it the costs of drilling and operating oil and gas wells.  Also, I would expect mineral rights and royalties to be bid up in price. So, if oil really would go up to $500 the profitability of the oil and gas producers is likely to peak much earlier, well before ever reaching those nose bleed prices.  This is age old oil and gas economics. Now that rumours and talk is going around stating that Eagle Ford and Permian and Bakken production is flattening because the easy stuff has been found and produced, I think chances are good that oil and gas prices are set for new highs; maybe not a historical high and certainly not $500 per barrel, but just high enough to start the next boom.  The longer the boom stays away, the less oil and gas investment and the greater the shortage of hydrocarbons that is likely to come.

So, who will likely benefit from bottlenecks in the pipeline capacity?  The U.S. at first sight, but many of their refineries count on heavier oil from Canada and… from Mexico and Venezuela.  Those last two appear, at least temporarily, to fall by the wayside. Hence the idea that Canada, nearly unavoidably, will send more and more heavy crude to the U.S. via pipeline and railway. (Oh, the environmental irony: increased railway based oil transportation!).  So, I think that, despite rising interest rates, during the next oil boom, pipeline companies will be more profitable than ever.  And oil as well as gas production will grow in Canada, that is plain economics.  To think alternative energy will become the dominant energy source on this planet? Not likely for at least a decade or 5 if not ever.  That is my scenario. Will I be right?  He, I can always buy shares in some electric utility companies as insurance. 

As to Eastern Canada and (I think) even more so B.C., they are counting way too much on their real estate.  Let’s wait a few years to see if I am right. But they are seeding trouble for in the future.  Changing climates are a fact of life and, really, I don’t know how much human generated CO2 is contributing.  Not too much in my opinion, certain when compared to CO2 concentrations that existed on this planet over the geological past.  In fact, there are geological theories (or biological) that during this interglacial period, CO2 levels are already low if not too low for promoting life and evolution on this world. Some predict that at current CO2 levels life on this planet may be extinct in 2 million years.  Ha, isn’t it funny how your outlook can change based on your perspective.  To try to spend excessive capital on controlling our CO2 output is just ludicrous.  Fighting pollution in general; adapting to changing sea levels are another matter entirely.  But in my books, forcing taxes and increased government interference in our lives by instilling fear in the masses is evil and highly misleading. My point of view of course; just another scenario. But I think my scenario to be a bit more balanced than the current ‘Climate Change Craze’.  Not that I think it is bad for people to think and care about their planet; but I prefer that this is done on a less emotional and more balanced basis.  If you think I am correct, you may also conclude that ‘progressive’ Canada is conceded, misguided and ‘pricing itself’ out of the market.

So, if you want to invest in Canada, I could think of much worse places to invest than in high dividend paying pipeline companies – especially now that they are a bit out of favour. I have been writing a lot about oil and gas lately. That is because I think there is a lot of profit to be made in the not too far future in this sector.  Also, investing in gold (as a form of alternative cash) and in other commodities seems to be a future profit centre. But do not forget that all these commodities are very cyclical and to take profits rather than consider these investments buy and hold.

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