Whoa, Canada!

President Obama’s rejection of the Keystone XL pipeline serves as the latest blow to Canada’s energy-based economy. Low commodity prices have dragged down the Canadian dollar and stock market over the past year, and the recent election of a leftist government isn’t likely to inspire renewed investor enthusiasm for Canadian equities.

Nevertheless, Canada now offers some of the best stock market bargains in the world. Most of the top junior mining stocks trade in Canada (on the TSX Venture), and they’re trading
down more than 80% below their highs of a few years ago.

Canadian energy companies used to gush out huge yields. Some still do, but many have been forced to cut or eliminate their dividends as share prices have plummeted.

The Guggenheim Canadian Energy Income (ENY) exchange-traded fund holds oil and gas companies that pay (or aim to pay) income distributions. However, this instrument is no longer suitable for most investors, in our opinion. Assets in the fund have dropped below $30 million. That raises liquidity concerns and the risk that Guggenheim will eventually shut it down.

If you want to focus on Canadian energy income, you may be better off assembling a portfolio of your own. Another way to gain exposure to Canada’s energy sector is simply to own the Canada ETF – iShares MSCI Canada (EWC). It dedicates 20% of its portfolio to the energy sector. And with $1.9 billion in assets, EWC has ample liquidity.

Canadian stocks trade at a valuation discount to the U.S. So U.S. investors who are looking for beaten-down value close to home should consider the opportunities available north of the border.

The Economics and Eco-Politics of Oil

Canada’s energy sector doesn’t ultimately depend on the Keystone pipeline. Low oil and gas prices gave the Obama administration the luxury of indulging in boutique environmental issues as an excuse to kill the project. President Obama’s rationale for cancelling a pipeline – that it would contribute to “climate change” – is absurd.

Oil from the Canadian tar sands will make its way to the U.S. and other export markets through rail and other existing pipelines. The question is whether the oil sands and other high-cost energy projects can return to profitability. And the answer is that they will when oil prices start rising back into the $80 area.

That may not happen soon enough for some energy companies. But it will happen eventually as U.S. shale production peaks. If you think oil prices are now at least somewhere near a floor, then Canada is a buy.