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New ETF takes the guesswork out of investing in the oil sands

by Wayne Cheveldayoff, 2006-11-16

Are you interested in investing in an oil sands company but you don’t know which to choose? No problem, you can now invest in all of them by buying just one security.

A new exchange traded fund (ETF), known as the Claymore Oil Sands Sector ETF, gives investors exposure to companies that are highly focused on oil sands production.

The ETF, which trades on the Toronto Stock Exchange under the symbol CLO, represents an easy way to achieve a diversified portfolio in this growing sector of Canada’s energy industry.

The Claymore ETF was launched on October 26 with an initial price of $20 per unit and, despite an initial dip, was at $20.55 two weeks later.

Anyone with a bearish view on oil prices, however, may want to stay away, since this security is not likely to do well if oil prices go down another 20 or 30 per cent.

But the odds right now are pointing in the opposite direction – namely higher oil prices in the coming years. World supply is being hampered by depleting oil and gas well production and world demand is likely to continue to increase steadily due to expansion in Asia.

A strong fundamental picture for the commodity is the reason British-based Barclays Capital issued an end-of-October forecast that West Texas Intermediate will climb to an average U.S. $76.60 a barrel in 2007 versus a recent price of around $60 per barrel.

If you think the flurry of exploration in Western Canada will alleviate the situation, you are going to be disappointed. The National Energy Board said in an October 26 report that despite all the exploration going on, gas production in Canada will rise by only 1 per cent over three years – an increase from 17.1 billion cubic feet a day in 2005 to 17.3 billion cubic feet a day in 2008 – with an expected decline in conventional natural gas production offset by new deliverability from coal bed methane.

In other words, strong drilling activity will be needed just to maintain our current production level, let alone increase it to meet rising demand from population growth and other sources.

The oil sands, with reserves second only to Saudi Arabia, represent Canada’s main opportunity to increase petroleum production in the coming years. So, companies operating there are likely to grow and prosper.

The Claymore Oil Sands Sector ETF (see www.claymoreinvestments.ca) has been designed to approximately replicate the performance of the Sustainable Oil Sands Sector Index. As with most ETFs, the annual management expense is very reasonable, at 0.6 per cent.

Companies are chosen based on current and projected oil sands production, percentage of total production focused on oil sands production, market liquidity and market capitalization. Of course, they also need to be publicly traded.

The ETF’s holdings as of November 1 were as follows (with percentage weightings in brackets): Suncor Energy (11.62), Shell Canada (9.23), Imperial Oil (8.78), Western Oil Sands (7.83), Canadian Oil Sands Trust (7.21), Petrobank Energy and Resources (6.87), Opti Canada (6.47), UTS Energy (6.03), Canadian Natural Resources (5.25), Connacher Oil and Gas (5.18), Synenco Energy (4.85), Encana (4.70), PetroCanada (4.26), Husky Energy (3.99), Nexen (3.68), Paramount Resources (2.22) and Enerplus Resources Fund (1.75).

This group of 17 companies had an average market capitalization of $16 billion, average dividend yield of 0.93 per cent and total current oil sands production of about 1 million barrels a day. Approximately 90 per cent of total oil sands production is covered by this group.

This is the first ETF to specialize in the oil sands sector, but several closed-end funds with a similar focus were launched earlier this year. These include (with TSX symbols in brackets) the Oil Sands Sector Fund (OSF.UN), Long Reserve Life Resource Fund (LRF.UN), Oil Sands and Energy Mega-Products Trust (OSM.UN), Enervest Energy and Oil Sands Total Return Trust (EOS.UN) and Alberta Focused Income and Growth Fund (AFZ.UN). All have annual management fees of around 2 per cent and all aimed at inception to provide cash distributions of between 5 and 6 per cent annually.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.


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©2006 Wayne Cheveldayoff