Three powerful energy plays

published 25 May 2006

Barry Norris,manager of the Britannic Argonaut European Alpha fund, tells MoneyWeek where he'd put his money now.

Oil discovery - like free love - peaked in the 1960s. Since then, although there continue to be a number of enthusiastic practitioners, its popularity has steadily declined.

In the 1990s, just 100 billion barrels of oil were discovered, compared with 350 billion in the 1960s. But the world used up around 250 billion barrels of oil in the 1990s, compared to only 90 billion barrels in the 1960s. Put another way, in the 1960s we found roughly four barrels of oil for every one we used. In the 1990s, we used 2.5 barrels for every one barrel we found.

In this decade, we are likely to use 310 billion barrels of oil - more than three times the amount of oil discovered in the last decade. New discoveries must also keep pace with this rising demand as well as replace existing reserves.

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One of the self-correcting mechanisms of capitalism is that high oil prices will inevitably attract new capital into the industry and this investment will ensure high energy prices don't become a bottleneck hindering global economic growth in the long term. So the world will invest more in finding new oil fields: it's just a question of how much, how soon.

Two stocks that will see the benefit of this spending are TGS Nopec (ticker 307880, listed in Oslo) and Vallourec (012035, listed in Paris). TGS has built up vast libraries of geological data that map oil deposits in both the North Sea and the Gulf of Mexico. Demand from oil companies for these surveys is on the up. Vallourec makes steel tubes used in the construction and maintenance of oil rigs. Business for both firms is booming. Luckily, most analysts following the stocks are too cautious about how long the upswing will last, which has created an opportunity to buy the stocks at good prices.

Nuclear power is the most economically viable alternative to oil. Nuclear currently accounts for 20% of electricity production. But governments worldwide are increasingly sanctioning the building of new nuclear plants, so demand for uranium will increase rapidly over the coming decades. The problem is that not enough uranium is currently being mined to meet this demand. Last year, the world used 170 mm pounds of uranium, but global production was just 90 mm pounds. Until now, the shortfall has been made good by former Soviet stockpiles, but these are coming to an end. So the price of uranium (like oil) is rising.

Investing in uranium itself is literally fraught with danger. Far better to buy a uranium miner like Southern Cross Resources (TSX), a Canadian-listed stock, which is currently in the process of merging with the South African outfit Aflease. The new entity will have 6% of the world's uranium deposits and if it can execute its current plans to ramp up production, this should result in glowing stockmarket performance.

High-yield opportunities

Last December, I wrote about the opportunities in Europe for investing in high-yielding stocks - recommending Motor Oil Hellas, Matav, Findexa and Frontline. An equally weighted portfolio of the four stocks over the last ten months would have returned 42%, which includes a healthy 14% dividend income.

Although Findexa has recently been subject to a takeover bid and the risks of investing in Frontline have substantially increased, Europe remains a goldmine for dividend-paying stocks. Given that nearly half of the companies on the European market yield more than government bonds, dividend yields are likely to continue to drive the market higher.