Equity Strategy May 10, 2008:

The energy sector has been the dominate mover over the past few weeks as crude oil moves up to new highs on a regular basis. The crude oil market is soaring as the US dollar declines relative to most major currencies globally. The continued robust economic growth in Asia has created a consistently high and increasing demand for oil that has more than offset the slowing industrial demand in the US.

The crude oil market has been surging ahead on the very strong fundamentals of supply and demand. The producing companies and countries can not keep up to the growing global demand that is being created by the industrialization of Asia. The addition of millions of new cars over the past few years has added a substantial amount of new demand from consumers and this situation is only going to become more pronounced as the economies of China and India add middle class at an increasing rate.

Unfortunately relatively low crude oil prices in the late 1980’s and early 1990 have stifled investment in exploration and new production on a global basis. There has not been any substantial new finds to off set the depletion of the major oil reserves globally. The world is running out of easily accessible and low cost oil production, most if not all of the new production coming on stream will be higher in sulfur content which will require increased refining before it gets to the user. The low cost shallow wells are becoming harder to find and the current ones in operation are in the last stages of production and will not last a whole lot longer. All of these changes will help to maintain a much higher price than consumers have become accustomed to over the past couple of decades.

The recent surge in crude oil has not been as dramatic as the oil shocks in the 1970’s but it will ultimately lead to a similar end result. The consumer will be forced to adjust their automobile usage in a more permanent manner as the realization that fuel prices are not going to decline dramatically, as this develops gasoline prices should stabilize. The question will be at what level will gasoline prices stabilize, likely at levels that are higher than we see today. So far the average North American consumer has not changed their driving habits materially in response to the higher prices, due in large part to the belief that the price spike is temporary and prices will fall back again later in the year. Unfortunately this is not likely to happen as global demand is not likely to decline sufficiently to force prices dramatically lower.

The Canadian energy sector is in an envious position with one of the largest energy markets in the world right on the doorstep and a dramatic shift in political sentiment that is trying to move rapidly towards a North American energy solution. Canada is already the largest energy supplier to the US and that position is going to increase as the move towards a more secure energy supply increases in intensity. The potential for the Canadian energy sector has never been as attractive as it is at the moment, with high prices and the largest consumer trying to increase the supply from secure and friendly countries rather than just looking for the lowest cost supplier.

As I have said many times in the past companies with exposure to the oil sands are likely going to move to a premium price relative to their peers due to the extremely long life assets, able to produce for 30-40 years, that the oil sands represent in a sector that is running out of long life reserves at an escalating rate. There are going to be hurdles that will have to be over come along the way to full production and utilization of the oil sands but with the potential for considerably higher prices over time these hurdles will be over come.

Suncor Energy Inc. (SU-T) should be a core holding in any well diversified portfolio. The company is one of the largest in the oil sands and is positioned to increase production substantially over the next 12 months. Suncor has a proven track record of growth over the longer term; the company is diversified with a natural gas subsidiary and Sunoco a refining and marketing subsidiary.

Suncor is very well positioned to benefit from higher crude oil prices in North America over the longer term. The company controls a massive long life reserve and the shares should trade at a premium to other oil producers due to the unique position these reserves place the company in the energy industry.

Major Canadian energy companies such as Petro Canada (PCA-T) are very well positioned for growth with international operations located in Canada, the North Sea and North Africa. The company announced an 82% increase in profits for the first quarter reporting net income of $899 million or $1.86 per share verses $560 million or $1.17 per share a year earlier. The increase is due in large part to higher crude oil prices. Petro Canada has a number of expansion initiatives underway including the completion of the Edmonton Refinery conversion project which will improve the profitability of the retail down steam business.

The future for growth in the Canadian energy sector looks very attractive as the world demand continues to expand and secure global supply of crude oil remains stagnant. The potential for much higher prices has increased over the past few years and will see even more pressure going forward as the economies in Asia expand.