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New faith in energy stocks

Rob Carrick

Monday, March 23, 2009

Ottawa — The monster rally in energy stocks is just a memory today, but it was quite something while it lasted.

Unless, of course, you were trying to benefit from the huge run-up in oil prices by owning the shares of Petro-Canada, easily the worst performer among the big names in the Canadian energy sector over the past five years with a laughably small cumulative gain over the period of 2.7 per cent.

That compares to 68.1 per cent for Suncor Energy, which has come to the rescue of long-suffering Petro-Canada shareholders with a merger proposal would create a Canadian energy giant under the Suncor name.

The Suncor deal provided hope not only to Petro-Canada shareholders, but also to people invested in other energy producers like Nexen Inc. Nexen shares soared by 8.9 per cent as of mid-morning, making it one of the top gainers in the S&P/TSX capped energy index. Other big gainers included Canadian Oil Sands Trust and Talisman Energy.

The deal faces an obstacle in the form of federal government rules that no person or company can own or control more than 20 per cent of Petro-Canada's voting shares. But even so, this is the news Petro-Canada shareholders have been waiting for. If you're among them, sit back, be patient and wait let the deal making play out.

For other investors, it could be time to start thinking about the energy sector today. Some market watchers believe the next bull market will be led by different sectors than the last one. But energy, metals and other commodities have one thing going for them that won't let them be written off as yesterday's market fad. It's scarcity. When global economic activity heats up again, demand for oil and other resources should move prices higher.

Last week, the price of oil topped $50 (U.S.) per barrel for the first time in two and half months. Some say the rise from $32.40 in December reflects growing optimism about the global economy, while others say it's just a matter of oil prices finding the correct level after falling too far. Either way, it seems clear that investors can't ignore energy.

Petro-Canada shares closed last week at $29.65. Suncor's proposal would give the company's shareholders 1.28 shares of the new company for every Petro-Can share they own. That amounts to a 25-per-cent premium on the 30-day weighted average of Petro-Canada shares.

Okay, Petro-Canada shares have lost almost 31 per cent of their value in the past 12 months. But at least partial redemption is at hand.

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