The Commodity Investor Q&A
With Matt Badiali
May 20, 2009

Q: You said that the natural gas price will remain low for the long term. Is there an investment you like that can take advantage of that? – A.H.

A: Cheap natural gas is great news for all energy-intensive businesses. And it's especially good for one segment of the oil industry: Canada's tar sands.

The tar sands consume just under 1,000 cubic feet (mcf) of natural gas for every barrel of oil produced. From 2007 to mid-2008, the cost of producing a barrel of tar-sand oil soared 40%. Much of that increase came from natural gas, which averaged $7 per mcf in 2007, but rocketed up over $12 per mcf in the summer of 2008.

Natural gas is a key component of tar-sand production – it generates the heat to make steam, which melts the tar underground. It's also pumped into the liquid to thin it and make it flow. So when natural gas prices are expensive, they can really hurt the margins on tar sands.

Today, oil prices are up 70% from their lows, but natural gas is only up 16%. That's a winning combination for oil sand producers: Costs are lower and sales prices are rising.

That adds up to bigger profits. You can take advantage of the best pure plays on the tar sands with Suncor (SU) and Canadian Oil Sands Trust (COS-UN in Toronto).

Q: You talk a lot about oil-service companies like drilling companies as a good investment opportunity. How come in the list of companies you suggest you do not include RIG or DO? – R.L.

A: That's a good catch. I didn't mention Transocean (RIG) and Diamond Offshore (DO) – both offshore drilling companies – because they never fell as far as the land drillers did. Back in April, I told readers I wanted to buy drill rigs rusting in parking lots for less than half the value they would cost to buy.

Transocean briefly dipped below the value of its ships, but not far. It has since climbed back up to trade at a premium. Diamond Offshore never traded for less than 2.5 times the value of its ships. That's just too expensive.

Commodity Q&A: These Funds Are Like "Options" on Oil There's an Amazing Opportunity to Double Your Money in Oil Stocks

Both of those stocks have climbed 40% since I told you about service companies... But we did much better in the super-cheap land stocks.

Last month, I recommended Parker Drilling (PKD) to the readers of the S&A Oil Report. We bought the company for less than 0.4 times the value of its rigs. We more than doubled our money... and the stock still sells for less than the value of those drill rigs.

Good investing,

Matt

P.S. We cashed out of Parker Drilling last week, but we own two other service companies that are rising today. If you're interested in capitalizing on the new bull market in oil, click here for details.