New advances in drilling techniques have spurred a modern day gold rush within the energy sector. Using these advances, formally "hard to crack" shale rock formations are now yielding an abundance of oil and natural gas. Shale fever has taken over many portfolios, as energy investors scramble to gain access to the Marcellus, Bakken and other geological regions.
However, as investors maintain their focus on the United States and its wealth of natural gas, our neighbors to the north are still ignored by many portfolios. Canadian energy stocks continue to present themselves as an intriguing opportunity. One that more portfolios should capitalize on. (For related reading, see Oil And Gas Industry Primer.)
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An Abundance of Resources
The shale revolution isn't just sparking an energy renaissance in the United States. Featuring some of the world's largest energy reserves, Canada continues to move forward as a global energy super power. According to the BP Statistical Review of World Energy, Canada accounts for more than 90% of all proven energy reserves outside of the Organization of Petroleum Exporting Countries (OPEC) and the nation is making major strides to tap into those resources.
First Energy Capital's research found that Canadian exploration and production (E&P) firms spent an estimated $62.5 billion on exploration and development projects in 2011. However, that number is expected to rise to nearly $67.3 billion in 2012 and $73.2 billion by 2013.
An estimated 2.5 trillion barrels of oil are located within the nation's oil sands and billions are being spent on tapping into those reserves yearly. The Petroleum Services Association of Canada estimates that drilling activity within the nation will continue to grow by roughly 10% in 2012.
The nation is also making strides to reduce its dependence on the United States. Currently, 99% of Canada's crude exports go to the U.S. However, Prime Minister Stephen Harper has pledged to reduce that figure and recently said of the canceled Keystone pipeline "that Canada will continue to work to diversify its energy exports."
Enbridge (NYSE:ENB) has already proposed a pipeline to move crude oil from Alberta to the coast. The end goal of the pipeline would be to ship that crude to markets in Asia. Canadian natural gas giant Encana (NYSE:ECA) has already begun construction near Kitimat, British Columbia of an LNG export facility, and Canadian commodity exports to Asian-Pacific nations rose nearly 60% during 2011. (For additional reading, see Natural Gas Industry: An Investment Guide.)
Adding a Dose of Maple Leaf Energy
The long-term picture for Canada's energy industry is quite rosy and yet many U.S. investors are underexposed to the nation. Adding a dose of Canadian energy could be a great play for the future. The Guggenheim Canadian Energy Income ETF (ARCA:ENY) is a great overall arching fund to prosper along with Canada's energy industry. The fund tracks 34 different firms including Penn West Petroleum (NYSE:PWE) and Canadian Oil Sands (OTCBB:C.COS). The ETF yields roughly 2.8% and charges 0.65% in expenses.
Like their U.S. counterparts, foreign interest in Canadian energy firms continues to rise along with global energy demand. Most recently, China's Sinopec (NYSE:SHI) paid more than $2.16 billion for Canadian oil and gas explorer Daylight Energy. To that end, analysts have cited both Talisman Energy (NYSE:TLM) and Nexen (NYSE:NXY) as potential targets. Both stocks have floundered, despite oil rising to $100, and feature strong assets. The pair is also large enough that only a super-major or state-oil company could make a successful bid. Already Nexen has partnered with Chinese energy giant CNOOC (NYSE:CEO) to explore the Gulf of Mexico and could see a buy-out from the Asian firm.
The Bottom Line
Just like the United States, Canada is undergoing an oil and gas renaissance. However, the nation continues to be ignored by most energy investors. With such great long-term potential, adding a dose of Canadian energy firms could be a great portfolio play. The previous stocks, along with Suncor (NYSE:SU), make ideal ways to play the nation's energy growth.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.