One Good Idea: Buy major energy companies

Their shares are cheap and are poised to rebound within weeks with the price of crude

By Dianne Maley
Globe Investor Magazine Online, November 24, 2008

The Source: Bill Tynkaluk, president, Leon Frazer & Associates Inc.

The Idea: Buy shares of major Canadian oil and gas producers.

With oil slipping below $50 (U.S.) a barrel this week, this would hardly seem the time to buy energy stocks. Indeed, oil companies are scaling back exploration and cutting production in response to the price collapse, apparently girding for a long slowdown. Even diehard energy stock supporters are being rattled by talk of $20 oil.

But oil is likely to rebound within a few weeks, Mr. Tynkaluk says. The drop, from $147 a barrel in July, has been sharp and swift, and the bottom is closer than many market-watchers expect, he said in an interview.

Once the economy recovers, tight supply will put upward pressure on prices, Mr. Tynkaluk notes. While the recovery may still appear way off in the future, the stock market tends to lead the underlying economy by several months.

And while there is much talk about alternative energy sources, they will take years to develop, he says. In the meantime, "people still haven't got rid of their SUVs."

Mr. Tynkaluk recommends buying shares of quality companies with strong balance sheets and good cash flow, such as Talisman Energy Inc., Nexen Inc., EnCana Corp., Imperial Oil Ltd., Suncor Energy Inc. and Canadian Natural Resources Ltd. Talisman, at $9.50, is down from a 52-week high of $25.40; Nexen, $13.40, down from $43.45; EnCana, $48.55, down from $97.81; Imperial Oil, $33.66, down from $62.54; Suncor, $20.03, down from $73.10; and Canadian Natural Resources, $40.09, down from $111.30.

"I think you will make a fair amount of money because when energy turns, it will turn with a vengeance," he says. The Payoff: Potentially large capital gains in a short period of time, followed by solid longer term gains as the world economy recovers and begins to expand again.

The Big Risk: The economy doesn't recover and instead falls into a long and deep slump, something Mr. Tynkaluk thinks unlikely. "If we go into a depression, there's no question I'm going to be wrong," he says.

The way he sees it, erstwhile growth leaders such as China, India and Brazil have plenty of money to invest in their economies to keep them afloat, so demand for energy will remain strong. "They will recover before we do," he says.

Why listen to Bill Tynkaluk?

Mr. Tynkaluk has been in the investment business for 52 years. During that time, he has seen several bear markets, so he's not as alarmed as some less seasoned market watchers. Of all the bear markets, "this is the most vicious one," he acknowledges, if only for its relentlessness. Leon Frazer has a reputation for conservative, value investing.

Special to The Globe and Mail