Published:
April 7, 2008
It's hard to ignore the transformation of Fort McMurray,
Canada -- a city so prosperous that it has been dubbed "Fort McMoney" by local residents. Real estate prices have roughly
tripled in the past seven years; the median price of a single
family home stands at $650,000, up more than $150,000 in just
the past year alone.
And with the vacancy rate on rental properties stubbornly stuck
under 0.5%, entire extended families cram into small two bedroom
apartments. Others choose to rent campsites on the edge of the
city to accommodate mobile homes. The town's population has
doubled in the past decade to 65,000 and is set to rise to more
than 100,000 by the end of 2012.
So what's the attraction of this remote city where temperatures
regularly top out at less than zero degrees Fahrenheit? It's
simple: cash.
The average salary in Fort McMurray stands at more than
$125,000. And due to a shortage of workers, those salaries are
rising fast. According to a recent story in The Wall Street
Journal, inexperienced truck drivers can earn more than
$100,000 per year, while experienced
welders can see their salaries top
$200,000.
What's Driving this Boom?
At the center of this boom and all that prosperity sits as much
as 1 trillion barrels of oil reserves locked in Canada's vast
oil sands. Fort McMurray is at the very heart of the Canadian
oil sands, the fastest-growing part of the nation's petroleum
industry. And Canada is an absolutely crucial player in the
energy market. In fact, the nation is the United States' largest
single source of imported oil, more important to U.S. oil supply
than even the entire Middle East.
Oil sands are a combination of a heavy, solid form of oil known
as bitumen mixed with sand, water and dirt --producers heat the
oil sands to separate the bitumen. And with a handful of additional
processing steps, bitumen can be used to make gasoline and other
refined products, just like conventional crude oil.
Oil sands are not a new resource -- the
price of crude was simply too low and conventional oil deposits
too abundant to make producing this resource economical. But
that's changed. With oil prices
around $100 per barrel today, the
oil sands are now immensely
profitable for producers.
And as our charts show, investment and production are
booming; oil sands production currently stands at more than
1.1 million barrels per day, more than one-third of Canada's
total. By the end of 2010, oil sands production is expected
to approach 2 million barrels per day, close to two-thirds
of Canada's total output. In fact, the main constraints
on growth remain
shortages of skilled labor and crucial equipment -- the very
shortages that have resulted in high salaries and economic boom
times for Fort McMurray.
Other Resources Play a Role
While Fort McMurray may be one of the most obvious examples
of economic prosperity in
Canada's natural resource industry,
it's certainly not the only one. The
importance of resources to the
Canadian economy can't be overstated
-- exports account
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for one-third of
Canada's economy, and the nation's
primary exports are commodities
including oil, natural gas, metals
and fertilizers.
The U.S. is the primary destination for these exports --
currently, 80% of Canada's exports go to the nation's southern
neighbor. But that doesn't mean the natural resource industry is
solely reliant on U.S. demand or that there aren't other
countries interested in Canada's natural riches. Chinese oil
giant CNOOC (NYSE: CEO) made headlines in 2005 when it invested
in a handful of smaller oil sands projects. While Chinese firms
have only invested a total of $300 million in Canadian oil sands
plays so far, more investment is likely in the future. Clearly,
this resource could be a valuable source of oil to fuel China's
growing demand.
And while many focus solely on the
oil industry, Canada is also a crucial supplier of other natural
resources. Canada remains the number one source of natural gas
imports into the U.S. market; Canadian production has been key to
meeting rapid growth in U.S. demand. And Canada also ranks as
one of the world's top five producers of commodities as diverse
as copper, uranium, gold, silver, zinc and lumber. All of these
resources are in high demand, particularly in fast-growing
emerging markets like China and India.
Furthermore, companies involved in the natural resources
industry are among the largest on
the Toronto Stock Exchange (TSX).
Energy stocks account for 29% of the TSX Composite, while
materials firms, including mining companies, make up another
20%. This compares to just 13.6% and 3.6% weightings for energy
and materials respectively for the U.S. S&P 500 index. That
means that the performance of resource companies and the
Canadian stock market are inextricably linked.
It's that heavy exposure to commodity-related industries that's
been the key driver of outperformance for the TSX in recent
years. The TSX increased +178% from the end of 1999 through
2007, compared to just about +4% for the S&P 500. That means a
$10,000 investment in Canada back in late 1999 was worth $27,800
by the end of 2007, compared to just $10,400 for the same sized
investment in the S&P 500. And over the past two years alone,
the Canadian market has bested the S&P 500 by a roughly
3-to-1 margin.
Not Just Commodities
But while the importance of commodity-related industries is
undeniable, it would be a mistake to assume that's the only
industry that's prospering in Canada. Just as in the U.S.,
retail and services industries account for around two-thirds of
GDP. And retail sales in Canada have been soaring in recent
years.
Of course, prosperity in service industries isn't entirely
divorced from Canada's mineral wealth either. Soaring commodity
prices have brought significant overseas investment into Canada,
and strong growth in these industries has helped power rising
incomes for a large number of Canadians. These positive trends
support spending and investment in other industries as well.
The data backs up the Bank of Canada's assertions that the
economy is on solid footing. Economic growth is expected to be
strong, and the unemployment rate is in the mid- 5% range -- close to the
lowest level in three decades. Even the real estate market
continues to boom despite weakness in the U.S. -- according to a
recent survey released by RE/MAX, Canadian real estate prices are
up +99% over the past decade and prices continue to move
higher. That's by far the longest and largest property boom in
Canada's history.
Canada's resilient economic growth and vast natural resource
wealth should continue for years. And it's easy for U.S.-based
investors to buy into the Canadian growth story -- a large
number of Canadian firms trade as American depository receipts (ADRs)
right on the major U.S. exchanges.
With this in mind,
in a recent issue
of
Market
Advisor, editor Paul Tracy completed a
list of 21 of the most attractive Canadian stocks trading on U.S.
exchanges. Additionally, he provided in-depth profiles of his
favorite four, each poised to skyrocket alongside the Canadian
stock market.
To learn the name of these
securities, and to read our special
report, Top Ten Stocks for 2008, we invite you to try a
no-risk subscription to
Market Advisor. To learn
more, please
visit this link. |
