May 2008 Archives

Last Sunday, EnCana Corporation (ECA) decided to split into two parts, with one part focused on natural gas and the other part on oil sands. While most financial journalists and analysts thought highly of EnCana's move, I think differently.

Those who believe EnCana's move was a smart decision point to increased focus and investors' ability to pick and choose which asset group they want in their portfolio. And, of course, many point to the two smaller sized companies being more attractive as take-over targets. My arguments for opposing EnCana's decision are almost the same. The natural gas and oil sands provided diversification. For example, if natural gas continues to be a weak commodity for several years, then investors in EnCana can enjoy the strong oil sands performance. Of course, some would argue that investors who want diversification could still buy stock from each company and thereby enjoy the diversified benefits. I am not sure, however, that having stock in each separate company provides the same benefit of having just one company.

Suppose, for example, that natural gas prices were fall substantially, both in absolute and relative terms, for several years. EnCana's natural gas might be forced to batten down the hatches while it rides out the storm. If the company remained whole, then the company might be better positioned to use its financial resources from the oil sands to purchase inexpensive natural gas assets.

While I agree that because EnCana's two separate pieces are now better (and easier) takeover targets, that is a bad thing. We Canadians have already lost too many of our resource company to foreigners. Although a strong supporter of free trade, I would like to have at least some our world class natural resource companies remain Canadian. My preference would be for EnCana to be an opportunistic acquirer rather than an aquiree.

In fact, if we look at recent history, we see larger oil and gas companies trying to get bigger, not smaller. ExxonMobil Corporation (XOM), ConocoPhillips Company (COP), and BP p.l.c.'s (BP) takeover of Amoco are all recent examples of giant energy companies having become even larger.

All that said, if we look at how EnCana performed relative to Canadian Natural Resources Limited (CNQ) or Suncor Energy Inc. (SU), we see that there is almost no difference. Last week, they all performed strongly and closed within a few percent of each other. That hardly seems like a ringing endorsement of EnCana's latest strategic maneuver.

I am long stock of EnCana, Suncor, and ExxonMobil.

My photograph of the Bow River Falls is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.

With the recent strength of the American dollar, I am ambivalent toward commodities in the short term. Longer term, I remain a steadfast bull. If you look at the Bloomberg Commodities Chart, you note that commodities recovered nicely after their dip and have dipped slightly again. If, as everyone believes, the U.S. dollar continues to rally, then commodities will suffer. In my view, however, the important signpost is what happens as we enter the second half of the year. Is the worst truly behind us, or does the worst remain ahead of us?

My own view is that we have yet to experience the worst. If I am correct, we should see further strength in commodities, particularly precious metals as well as oil and gas.

The severity of this recession is difficult to anticipate. On one hand, the jobs numbers do not look too bad yet. On the other hand, economic weakness persists because of all the headwinds of high energy prices, falling house prices, tight credit markets, and increased uncertainty. So we just need to let events unfold and react accordingly.

Given my ambivalence toward commodities, have I lightened up on oil stocks? I probably should but have not yet. While oil prices are coming off their recent highs, I remain bullish on oil and remain unconvinced that oil will fall much further. With regard to gold and silver, I am keeping my gold and silver related stocks. In short, I am in a holding pattern.

My photograph of the Bow River with the Rocky Mountains in the background is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.