What Was I Thinking?

Checking out another stock blog, uglychart.com, I did the unthinkable. I clicked on a Google ad, one that leered at me, offering a free newsletter of top 2006 stock picks. Curiousity got the best of me, so I used my spammy hotmail account to obtain a pdf file from NewsletterAdvisors.com.

I received a professionally-produced-seeming document featuring stock picks from a variety of subscriber-dependent stock newsletters. I had heard of the Gardners from Motley Fool, but the others were new to me.

The first pick, courtesy of Louis Navellier and his Blue Chip Growth Letter, is on the Pig Stock Watch List--Suncor Energy (SU).

Here is the second half of the report just for you, so you don't have to suffer the indignity of finding the report yourself:

Fundamentally, Suncor is probably the strongest oil company on my
current Buy List. It has incredibly healthy operating margins, and is
ready to handle the long-term energy boom.

It’s one of the largest producers of oil and natural gas in North
America.

The company recovers bitumen—a very heavy oil—from the oil
sands and refines it into useable products.

Suncor is a fully integrated energy company with a long, successful
history in the oil and natural gas businesses. In the second quarter of
this year, net earnings were $112 million, and cash flow from operations
was $305 million. The company has increased shareholders’
wealth 16-times over in the last ten years.

During the quarter, Suncor made significant progress in rebuilding
portions of the oil sands plant damaged by a January fire, and they
expect to return to full production capacity in the third quarter. Major
repairs are complete, and the remainder of the reconstruction
effort is now focused on replacing piping and
electrical systems to support operations.

Planned maintenance, which had been originally scheduled
for September, was brought ahead and was near completion
at the time of its last earnings announcement. Once that is
done, Suncor expects to commission new expansion projects at the oil
sands plant and increase production capacity by the end of the year.
Tar sands companies like Canadian Natural Resources and Suncor are
sensitive to oil prices. However, the oil they get out of the tar sands is
sweet. They use natural gas to generate a lot of steam to get the oil
out of the tar sands, extra-expensive sweet crude that’s in high
demand. These tar sands companies will be doing very well for a long
time. Yes, the cost of natural gas has gone up, but the margins
to extract the crude are still very fat.

We’ve already made a lot of money with Suncor (up 139%) and I
expect to make a lot more. We're still in the early stages of this oilsands
boom. The company will boost daily capacity to a half-million
barrels by adding their third plant. And overall, they expect to boost
output 50% by 2008. Buy it under $66.

SU is a pure play on the Alberta oil sands, and yet I've been hesitant after looking at some fundamental numbers. Comparing SU with other independent oil and gas companies at SmartMoney.com, SU has a lagging net profit margin, a price/cash flow ratio two to four times higher, and a forward P/E of 40. Take the forward P/E; two companies involved in the Canadian oil sands, Imperial Oil (IMO) and Murphy Oil (MUR) have forward P/E ratios of 16 and 13.

I wonder if oil sands optimism is already priced into SU? Or do the past numbers fail to reflect the huge potential for SU in Alberta as the biggest individual player? Is the best investment Suncor's growth, or in a more conservatively priced IMO?

If SU is using so much natural gas, is Canadian natural gas company Encana (ECA) worth a look?

Navellier mentions (not in the above excerpt) Chinese demand, and throws out a Goldman threat of $105 oil before begging off. But these arguments favor investing in oil stocks in general, not specifically in SU.

Navellier says: "Fundamentally, Suncor is probably the strongest oil company on my current Buy List." The lawyer in me is suspicious. Parsing this sentence, "probably the strongest" is flimsy support. The reader gets no further information as to the other oil stocks on Navellier's buy list. And where are the numbers, the evidence of Suncor's strong fundamentals? He cites net earnings and cash flow in a vacuum, without context. Remaining numbers mentioned in the piece: SU's return to shareholders over the last ten years (16-times!), and Navellier's personal gains (139%!).

Fine, I'm analyzing an internet sales pitch for a fee-based newsletter. The Wizard of Oz springs to mind, where there's just an old man behind the curtain using a booming microphone and flashy lights to fool me into thinking he has the answers.

I'm not convinced. I still don't know which oil play to make.

SU - Pro: Pure oil sands play plus growth potential. Con: Growth priced into its outsized P/E.
IMO - Pro: Tremendous free cash flow and oil sands exposure. Con: High PEG.

Or maybe an indie oil and gas producer like XTO or Apache (APA) - Pro: PEG below 1.0, net profit margins and ROE significantly higher than SU and IMO. Con: No oil sands exposure.

Navellier's Blue Chip Growth Letter and its ilk, as well as top stock lists, can be informative, and spur ideas. Lately they've provided some nice blog fodder. But at least for me, this stuff raises more questions than provides investible answers.