Sunday, May 29, 2005

Sugar and Cotton Investments, as Oil Rises


Saturday, May 28, 2005 Updated at 3:17 AM EDT

From Saturday's Globe and Mail

Profile: A New York-based celebrity investor who wrote Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market; also operates the $1.5-billion (U.S.) Rogers International Commodities Index Fund

What he's doing now: Buying sugar and cotton to benefit from high oil prices.

Forsake black gold for the stuff you spoon into your coffee and the material they make underwear out of? “If you want to invest in oil, the best thing to do is buy sugar,” Mr. Rogers said. “The price of energy is near its all-time high, while the price of sugar is 85 per cent below its all-time high.”

Your attention is now directed to Brazil, a major global sugar producer that is struggling with low sugar prices. As Mr. Rogers tells it, the Brazilian government is helping its farmers by encouraging the use of ethanol, a fuel that can be made from sugar and used to power cars. “You're going to see more and more sugar converted into ethanol, which will drive down the supply of sugar and obviously drive up demand.”

The case for cotton works in a similar fashion. Many synthetic fabrics are made from petroleum-based products, which are a lot more expensive today than cotton. That's why China and other countries are starting to replace synthetics with cotton, which is trading 70 per cent below its record high.

Mr. Rogers said that individual investors can easily trade sugar and cotton futures using a commodity broker, and that analyzing these familiar products is a lot easier than the dot-com stocks people were crazy for at the beginning of the decade. Oil trades on futures markets as well, but forget about that.

“Sugar, to repeat, is 85 per cent below its all-time high, so we're not talking about something that that has already been exploited,” Mr. Rogers said. “In my view, sugar is going to at least triple, quadruple, quintuple over the next few years.”

Name: Eric Sprott

Profile: Runs Toronto-based Sprott Asset Management, a family of mutual and hedge funds that includes Sprott Canadian Equity, the best performing fund in its category over the past five years and Sprott Energy, the top performing natural resources fund over the past 12 months.

What he's doing now: Investing in unconventional resource plays.

The view from way up high on Hubbert's Peak has a way of opening your mind as to what's an economical source of oil and gas. Marion King Hubbert accurately predicted in the mid-1950s that U.S. oil production would peak and then start a decline around 1970. Now, Mr. Sprott and others believe the same thing will happen this year with global oil production. From that vantage point, it's natural to look at sources of oil and gas that were previously dismissed as too expensive or too difficult to exploit.

Examples of these unconventional energy sources include oil found in tarry sand, gas and oil found in a kind of rock called shale and coal-bed methane, which is natural gas derived from coal deposits. In a world of low oil prices, these resources would go untapped. Today, they're one of Mr. Sprott's preferred ways of profiting from high oil prices.

“It's all economics,” he said. “We've known all along that these deposits are there, but there's been a question of how we get this stuff out of there economically.”

Mr. Sprott said the companies looking at unconventional sources of oil and gas include EnCana Corp., the fourth-largest Canadian oil producer as measured by the value of its stock. In fact, EnCana has been selling conventional oil and gas properties to focus on the unconventional.

But EnCana is not a stock that interests Mr. Sprott right now, much as he admires the company's strategy. “We at Sprott Asset Management should be able to find something with a little more bang for the buck,” he said. Along these lines, he's bought companies like Canadian Spirit Resources, which explores for coal-bed methane in Western Canada; and Ultra Petroleum, a Houston company with properties in the United States and China; and Quicksilver Resources, a Fort Worth, Tex.-based specialist in unconventional energy reserves that has operations in Alberta.

Name: Chip Hodge

Profile: Managing director in the bond and corporate finance group at John Hancock Financial Services in Boston, which is part of Toronto-based Manulife Financial. He oversees about $4.3-billion (U.S.) worth of corporate bonds from the oil and gas sector.

What he's doing now: Getting ready to buy on the dip because the underlying financials for oil companies are solid.

When technology stocks crashed after an unbelievable runup, many investors were surprised to learn that the sector was full of financial weaklings with minimal revenues and zero profits. Oil companies are quite the opposite, according to Mr. Hodge's analysis as a bond manager assessing how likely he is to receive his interest payments. “From a credit standpoint, a majority of companies are going to be in great shape all the way down to $35 oil,” he said. “The reason is that a majority of companies have got their balance sheets in good shape and they have been very disciplined in their investments.”

All right, the oil sector is financially healthy and largely well-managed from a financial point of view. The question is, when's a good time to buy? “To the extent that people get scared and trade out of oil when the price goes to $40 or sub-$40, those are the opportunities you look for to reload,” Mr. Hodge said.

An economic slowdown in the United States is one possible trigger for a pullback in oil prices. But Mr. Hodge thinks oil prices would snap back because of tight global oil supplies and rising demand from economic growth in China and India, as well as the United States.

Mr. Hodge believes that the biggest risk facing investors in the energy sector is not related to economics and oil's fundamentals as a commodity, but rather to managers at individual companies and their ability to handle success. In the past, he explains, oil companies tended to spend every available dollar in boom times on exploration projects that may or may not have panned out.

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