A U.S. invitation to Canada’s oil sands
Whatever the fallout from the Gulf oil spill, it’s sure to profit investors who pick seven stocks involved in the oil sands, says a U.S. advisory.
The ugly duckling looks a bit more fetching these days.
Alberta’s oil sands have been carrying a burden of high costs and environmental unsuitability around with them for some time.
But as more and more oil oozed out of the shattered Macondo well in the Gulf of Mexico, that burden seemed to shrink.
Does BP’s oil spill make life easier for companies in the oil sands?
Many energy industry observers think so. One leading U.S. advisory, Personal Finance, is telling investors they should be lining up for Canadian energy stocks.
This opinion comes from two experts who follow Canadian stocks very closely. In addition to his regular work for this advisory, Mr. Roger S. Conrad edits Canadian Edge, and Mr. David Dittman is his associate.
They have seven stocks to recommend. Four are energy stocks, while the other three are in building, transportation and recycling.
Never cheap or easy
No one can be sure how many restrictions might be placed on offshore drilling as a result of the Gulf disaster. Offshore drilling will certainly not be brought to a standstill around the globe.
But at the very least “it faces sharply higher costs to meet what are certain to be tough new safety standards,” say these authors.
This is good news for the oil sands, they explain to their readers. Alberta produces 85 per cent of the world’s bitumen reserves, making these the largest proven oil reserves outside of Saudi Arabia.
The oil sands produced some 300 million barrels of oil equivalent in 2009 and that should double by 2018, they report. “That’s a major incentive for easing regulation and taxation,” the authors write.
Provincial and federal support is crucial, they add. The number of wells drilled follows the price of oil up or down, thanks to high production costs.
“Producing from the sands will never be cheap or easy,” admit these authors. The oil sands use copious quantities of water and leave some toxic sludge ponds. Then there are deforestation and carbon emissions to worry about. These problems will never entirely go away.
All this adds up to what analysts call high barriers to entry. Only rich companies need apply. But in today’s skittish markets, say the authors, those companies are just what the oil sands aren’t — cheap.
The starter-upper
The Great Canadian Oil Sands mine started up in 1967. The starter-upper was Suncor Energy (TSX/NYSE-SU), now a giant in the industry.
The merger with Petro-Canada is almost a year old, and Suncor turned out 563,600 barrels of oil equivalent per day (boe/d) in the first quarter.
Suncor is slicing debt and making systems upgrades, the authors explain, so oil sands output should fall to 60 per cent of its total production this year. After that, it will shoot back up 10 per cent.
How profitable this will be for Suncor depends on oil prices, say the authors. The stock is a buy up to US$35 and trades at $29 in New York, $31.38 in Canada. It yields 1.2 per cent on the $0.40 dividend.
Another big presence in the tar sands is Canadian Oil Sands Trust (TSX-COS.UN; OTC-COSWF), which makes almost all of its money from its 37 per cent interest in the Syncrude project.
Maintenance failures caused output to drop in the first quarter while operating costs went up. Yet profits jumped nearly fourfold. Within 10 years, production should reach 600,000 boe/d.
This trust becomes a corporation on January 1, and the dividend will depend on oil prices. It’s a buy under US$35. It trades at $26.98 ($25.57 in New York) and yields a robust 7 per cent on its $2 distribution.
High percentage bet
“The highest percentage bet on Syncrude’s growth,” say the authors, is Pembina Pipeline Income Fund (TSX-PIF.UN; OTC-PMBIF). It holds the franchise on the storage and shipment of Syncrude’s production. Plus it has similar contracts with Canadian Natural Resources’ oil sands system.
Of course Pembina also has many other energy assets flowing through its lines, including “Canada’s fast-growing shale output.” It has promised to keep the dividend intact when it converts to corporate status. A buy up to US$18, it trades at$17.05 in New York and $17.86 in Toronto, yielding a rich 8.7 per cent on that not-to-be-changed distribution of $1.56.
Penn West Energy Trust (TSX-PWT.UN; NYSE-PWE) has recently received “a shot in the arm” for its oil sands operations with a US$1.3 billion capital injection from China Investment Corporation.
Add this to its light oil reserves and the future looks good. Penn West has said nothing about its dividend on conversion, “but trading at 80 per cent of the value of its reserves, it’s a bargain regardless of the future payout,” say the authors. It’s a buy up to US$22. It trades at $19.36 in New York, $20.39 here, yielding 8.8 per cent on the $1.80 distribution.
Like the Klondike
As in the Klondike a century ago, activity in the oil sands has spawned a veritable beehive of new development. Three companies are in the forefront of it all, say these authors.
Bird Construction Income Fund (TSX-BDT.UN; OTC-BIRDF) is building everything from production facilities to schools. Its order backlog is above $1 billion and its first quarter earnings were up.
It too promises to keep its dividend intact, and these experts make it a buy up to US$33. The price is $29 in both New York and Toronto and the units yield 6 per cent on the $1.80 distribution.
Canadian National Railway (TSX-CNR; NYSE-CNI) “is gearing up to facilitate the export of oil sands to the Far East, via a proposed rail network.” The ultimate target is 4 million barrels a day.
The authors have a target price of US$60. It’s $57.74 in New York — $60.75 on the TSX — and yields 1.7 per cent on the $1.08 dividend.
Newalta Corp. (TSX-NAL; OTC-NWLTF) “crashed and burned” with the economy in 2008. But it is a leader in industrial and resource cleanups, and has the inside track on the oil sands. Newalta saw a 145 per cent increase in cash flow in the first quarter, with higher prices for its recycled products.
Buy this stock up to US$10, say the authors. It trades at $8.30 in New York and $8.75 here, yielding 2.2 per cent on a dividend of $0.20.
Unlike the ugly duckling in the story, the oil sands may never turn into a full-fledged swan, admired by all.
But these experts believe the world will be more eager than ever to tap into its vast reserves — and that investors should be lining up for the big bonanza.
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