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2006-06-26 :: Safe Reserves Rule the Markets

Last week, we saw Anandarko bid to purchase Kerr-McGee and Western Gas at +40% premiums.  Today, we have Phelps Dodge bidding to purchase Inco and Falconbridge at +20% premiums.

The common factor in these purchases is the fact that the reserves in the ground for these four companies being purchased are in the US and Canada.  This goes a long way to confirming our investment thesis that owning commodity companies that have reserves in politically secure areas of the world will be the jewels of an investment portfolio.

Friday, we saw a nice move up in the energy stocks based upon the realization that all of the cash sitting on balance sheets of oil companies would likely be used to enhance shareholder value.  We pointed out  a couple of weeks ago that all of this cash would likely be used for share buyback programs and increased dividends.  This was followed by the announcement of several of these moves.   Now, we are seeing that the next stage in this investment cycle is upon us, the consolidation phase.  The difference now is that we don’t have consolidation for consolidations sake.  What we do have is strategic moves to acquire reserves in countries that have strong property rights and that won’t nationalize oil and mine operations.

This will likely be a long-term unfolding story and one that will positively impact the share prices for my favorite investment group, the Canadian oil sand companies (Suncor, Imperial Oil, Canadian Natural Resources, Canadian Oil Sands, Western Oil Sands, and Birch Mountain).

When we have stiuations like Venezuela and Bolivia nationalizing oil fields and mines that companies have sunk billions into developing, like Indonesia  and Uzbekastan bringing serios charges against Newmont Mining for environmental issues and back taxes that are really swipes at the US government by proxy, and like Nigerian rebels taking hostages at oil operations there, owning assets in Alberta or Wyoming is a much more predictable investment and valuable investment.

If you are managing your own funds out there and you don’t have any of the oil sand stocks, now is agreat time to be a buyer, particularly if we see continued upward pressure from M&A activity.

More later!

Mark