READERS’ RESPONSE
Comment:
I read your excellent analysis of the current situation surrounding Canadian Oil Sands Trust. I have been following this company closely for about three years. I own this stock via COSWF.PK instead of COS-UN.TO on the TSX. If you have just a second, my question to you regards the validity of this type of ownership. My primary concern is that COS Trust does not recognize trading via the symbol COSWF.PK. This has always made me nervous, but COSWF.PK continues to plod along and behave appropriately and track COS-UN.TO like it should. The quarterly dividends are received into my Schwab acct on-time each quarter. Is this a safe way to invest in COS Trust, especially in light of my long-term horizon for holding the stock? At the time I first bought COS Trust, I don’t think Schwab provided a way for me to buy directly off the TSX.
Do you publish your entire portfolio or just the top 5 holdings?
I am disheartened to see how much you just reduced your oil sands holdings. Your recent COS Trust piece seemed to indicate you are quite bullish on Canadian oil sands despite the political environment?
You and I appear to think a lot alike. However, I can’t help but notice your lack of interest in E&Ps. I am big on E&Ps for what seems like obvious reasons to me. I’m curious if you would shed some light on your opinion?
Thanks a lot for any insight you can provide.
Phillip, 10/9/07
Response:
I believe COSWF is the vehicle that is intended for use by Americans. It’s how I own the stock too. As far as I know, there is no risk of not being an owner of the stock by virtue of buying it this way. If you want further clarification, the company’s IR department is very responsive to inquiries.
In terms of the oil sands positions, I sold the less mature producers that have substantial capital requirements for attaining reasonable production levels because I fear that the new tax threats could force those companies to have to re-evaluate the investment decision. COSWF has the great bulk of its investment behind it and also has a special agreement with Alberta regarding taxation that may save them from a substantial increase in taxes. Moreover, they are significantly cash flow positive and offer a good and likely growing dividend. For those reasons, COSWF has become my primary oil sand vehicle.
As for the E&Ps — I don’t favor the majors because of their declining reserves and the difficulty or impossibility of replacing production with new reserves longer term — and even short term for most. The independent E&Ps are the way to go, but many of them have a lot of gas, which is not an area I favor at the moment. Thus, I prefer other ways to play the expectation of a long-term increase in the price of oil as we eventually approach and then pass Peak Oil.
Comment:
My husband and I are searching for an oil services ETF that holds only (or mostly) NON-US companies. Do you know of any you would recommend? We can’t find them.
By the way, I happen to be a big "Peak Oil" believer and would love to know if you have any new internet/book resources you can recommend on this topic. I’ve read about 7 books on the topic but am still open to more.
Thanks!
Laurie K., Minnesota, 8/16/07
Response:
Virtually all oil service companies operate internationally. Halliburton is even headquarted out of the U.S. now. So when you buy the OIH oil service ETF you are buying international companies. That’s my choice for an oil services ETF.
The problem with books on Peak Oil is that the information tends to get dated very soon, so I think web-based information is also important in order to be current. I like the work of Chris Skrebowski and have posted some of his writing and thinking on the Information and Links part of this web site under "Oil Supply and Demand". You could start there and then Google him for more. There are also other links relating to Peak Oil listed in my Links area. You are probably familiar with most or all of them.
In terms of books, aside from Simmons’ classic Twilight in the Desert, I found two others particularly useful: Tertzakian’s A Thousand Barrels a Second and Deffeyes’ Beyond Oil. Hope that helps.
Comment:
My husband and I are enjoying reading about your investment approach. We have done extensive research on peak oil issues and investment strategies and a good portion of our portfolio is in a combination of integrated oil & gas, oil services, and alternative energy.
Recently, we’ve become aware of oil royalty trusts as an investment option. I’m wondering if you have any thoughts on the subject? From what we have read so far, it appears that they may provide a potentially good return, minimum 7–8% with a potential for a much stronger upside as the price of oil rises. If one invests, there are tax issues. I realize you are not a tax advisor, but if you have any thoughts on investing in either U.S.-based or Canadian-based royalty trusts, that would be of interest as well.
Thanks for your time and thoughts.
A.A., 8/15/07
Response:
Thanks for your thoughtful question. Oil and gas royalty trusts are a popular and excellent investment vehicle. Their dividend yields are high and they have appreciation potential if the prices of oil and gas increase.
There are significant differences between the Canadian and American versions. Canadian RTs try to maintain or increase their oil and gas reserve levels by reinvesting some of their cash flows in new fields, but American RTs are prohibited from doing that. Therefore, buyers of American RTs are essentially owning a declining asset and some of the dividend is a return of capital. Canadian RTs also yield on average about 3% more than American trusts. For both the larger dividend and the stable or growing asset base, I tend to prefer Canadian RTs.
On the other hand, there are taxation issues for Canadian RTs that are both positive and negative. Canada has recently passed a new tax law that is scheduled to be effective in 2011 and will put a 35% tax on distributions to foreigners, thus potentially lowering their yields significantly, an important negative. On the other hand, the law is still being disputed in Canada and the trusts may have options for converting into other corporate forms that may be more appealing — or selling out to a corporation or private partnership, which could possibly yield a capital gain. But net, the new tax law is a negative. But on the positive side, dividends from Canadian RTs are taxed by the U.S. at the preferred 15% rate, which the Canadian company will withhold before sending you the balance. American RTs are generally taxed like REITs (not the preferred 15% rate), although the dividends of some American RTs may be treated in part as a return of capital. Bottom line: each American RT must be researched individually to determine taxation rate.
In general, I am not enthusiastic about either American or Canadian royalty trusts because I do not like the Canadian tax issues and I do not like the declining asset base of American RTs. But yields are great and appreciation potential does exist. I just think there are better strategies for investing in oil- and gas-related companies.
However, one of my favorite stocks is a Canadian trust, Canadian Oil Sands Unitrust. It is like a royalty trust but it is devoted 100% to the development of the largest oil sands asset in Canada. The current dividend is just north of 5%, but there is a substantial likelihood of near-term dividend increases. The company has indicated a desire to return as much cash to unitholders as is prudently feasible before the new Canadian tax impacts them. Management is oriented to maximizing shareholder value, and I therefore suspect they will do something within the next five years, before the new tax is applicable, that will be good for shareholders. They have said they are looking at various possible actions. In the meantime, they own one of the most valuable oil assets in the world, and one that should provide increasing cash flows and dividends over the next five years.
Comment:
I read somewhere that last year oil went up going into hurricane season and after there were no big storms it went down for the rest of the year. Is that a valid observation? If so do you think this might happen again if we don’t have a big hurricane season?
C.W., 7/27/07
Response:
That’s pretty much what happened last year. If the oil price goes into a similar downturn I doubt it will be about the weather because lately there has been relatively little hurricane talk. Remember, last year Katrina was fresh in everyone’s mind; not so much now. Now there is an expectation that oil demand will grow in the 3rd and 4th Qs as refineries build heating oil inventories on top of the other strong global demand sources, that the Saudis will have to increase output to meet the greater demand, and that they may well refuse (or possibly be unable) to do so. Going into the fall if inventories seem to build rather than decline, regardless of hurricane damage, prices could well tumble again. I doubt this will happen because I think the fundamental global supply/demand balance is a lot tighter now than it was last year. But nobody has a crystal ball; in the short term anything can happen. Which is why my basic strategy is to be a long term investor.