Why This Resource-Rich Country Should Be in Your Portfolio

Source: Jared Grove via Wikipedia.

When investors consider international options, Canada is frequently overlooked -- even though our friendly neighbor to the north is right next door. Yet Canada offers numerous benefits and minimal political risk for investors seeking international exposure. Canada is so overlooked that you might not realize it's missing from your portfolio.

Natural resources
Canada constitutes only 4% of global market capitalization. However, Canada has a lot to offer investors, including bountiful natural resources. Canada is a big exporter of oil and other commodities.

In fact, Canada is the main source of U.S. energy imports, based on data from the U.S. Energy Information Administration. Canada has the world's third-largest verified oil reserves behind Saudi Arabia and Venezuela. Aside from Russia, Canada is the only top 10 oil-producing country that is not part of OPEC.

The Canadian energy boom
For investors seeking to ride the energy wave, which can be volatile, Canada offers a number of strong oil and gas stocks. While some may prefer to focus on the U.S. energy boom, allocating some money to Canada's energy sector could diversify your portfolio and thereby reduce risk. Canada's resources are in demand not only in the U.S., but in rapidly industrializing emerging markets that require raw materials to fuel economic growth. 

Canadian Natural Resources is a large independent energy company. Canadian Natural Resources has assets in low-political-risk locations: the oil sands of western Canada and the North Sea area of the U.K. It owns a balanced mix of oil and natural gas, as follows:

  • 40% crude oil and bitumen.
  • 30% natural gas.
  • 30% light crude oil, natural gas liquids, and synthetic crude oil.

Having a balanced mix of assets gives the company the flexibility to allocate capital across these assets in accordance with the commodity price cycle. This gives the company a strategic advantage compared to competitors. 

Canadian Natural Resources' current price-to-earnings ratio is approximately 19, which is about 17% lower than the industry average of 23. Moreover, this P/E ratio of 19 is about 10% lower than the company's five-year average of 21.

Suncor Energy  is the largest energy company in Canada by market cap. The company's major assets are located in the oil sands of western Canada, the North Sea, and off the east coast of Canada. Suncor is squarely focused on oil, which accounts for about 90% of production. Due to Suncor's focus on oil, the company is not as exposed to low natural gas prices as others. Suncor is more integrated than Canadian Natural Resources, as Suncor has significant downstream refinery operations. 

Suncor currently trades at a P/E ratio of about 15 times earnings, which is approximately 35% lower than the oil-and-gas industry average of 23. Suncor's current P/E ratio of 15 is also 29% lower than the company's five-year average of 21. 

Another Canadian energy stock to consider is Encana . This company has been exposed to weak prices for natural gas. As a result, chief executive Doug Suttles is spearheading a turnaround at Encana designed to sell non-core assets, pay down debt, and emphasize high-value oil assets and liquid gas. Liquid gas has higher returns than natural gas.

Encana's stock is trading at a P/E ratio of about 22, which is 57% higher than the natural gas industry average of 14. While Encana's P/E ratio is high compared to its peers, it is 41% lower than the company's five-year average of 37. Overall, at current levels, the P/E valuation for Encana is not as attractive as Canadian Natural Resources or Suncor. However, Encana is positioned for better results down the road due to its turnaround efforts. 

Don't forget to look north
Canada provides many of the benefits of investing in international markets, including portfolio risk diversification and exposure to commodities. But the country is often forgotten due to its proximity to the United States. Unlike many international markets, Canada does not pose a high level of political risk. Allocating a small portion of your portfolio to Canada could help to balance out your international holdings and help you sleep better at night. 

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The article Why This Resource-Rich Country Should Be in Your Portfolio originally appeared on Fool.com.

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