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Canadian Oil Sands Keeps Rolling
By Chip Hanlon | March 12, 2008 | 10:15 AM | 0 CommentsTweet This
With its break into the low 40's, Canadian Oil Sands (COS-U CN) has been on a roll ,reflecting more than any other energy trust the rising price of crude. Despite its unique story, we're consistently surprised at how little investors seem to know about this company compared to other energy trusts, so a simple run-down is provided here.
COS is the only Canadian energy trust to provide a pure play investment into Alberta's oil sands, by way of its 36.8% interest in the huge Syncrude project. Most energy investors do know, however, that this oil sands region represents the world's key future energy source, with recoverable reserves rivaling those of Saudi Arabia.
A look at the chart will show that this stock has already been a performer, yet its recent move above $40 signified a triple top breakout, a strong and reliable pattern under point and figure technical analysis.
Fundamentally, the story is also quite solid. For example, there remains ample room for growth in output; producing at a rate of 300,000 barrels per day (bpd) as we exited February, the Syncrude project's current productive capacity is actually 350,000 bpd and is slated to grow to 500,000 bpd by the middle of the next decade.
Thus, more than any other energy trust Canadian Oil Sands likely offers the most opportunity for total return, offering potential growth in addition to its admittedly lower-than-average distribution of nearly 7%-- yes, that's small in this group.
In addition, investors can expect continued benefits from a management services agreement which gives Syncrude access to resources of Exxon Mobile (XOM) and Imperial Oil (IMO). This agreement has already yielded significant results, improving the venture's safety, maintenance, environmental and procurement processes.
Despite the rosy story above, all companies carry some risk and in the case of COS, it is a familiar--and particularly Canadian--one: politics.
We all know about the 2006 Halloween surprise which changed the tax structure for all energy trusts, but there is also the change in the royalty (tax) regime within Alberta, proposed by the provincial government last year. This announced change still contains some complex moving parts as it might apply specifically to Syncrude, but it will ultimately result in a higher tax take for the government at the expense of the trust. However, this situation is known and should be essentially priced in already.
As part of our ongoing research in the energy trust space, one of our research associates visited the company on a visit to Calgary last month and confirmed a different ongoing area of political concern: the environment.
Not surprisingly, the extreme political left has been making noise about the negative environmental impact of oil sands development, with particular scorn coming from Europe. That said, the industry is quite sensitive to the issue and has already begun to fight back, pointing out that oil sands is responsible for just one-tenth of one percent of all global emissions. Also showing its sensitivity to this ongoing issue, Syncrude is planning a carbon capture program to further limit its own emissions.
From a practical standpoint, one would hope that Canada's politicians realize the energy resource is simply too important and the economic benefit of this industry is too beneficial to cut its legs out from under it, but Canadian energy trust investors know such political sense can't be taken for granted.
Still, for an interesting total return play in the energy space, investors would still be wise to get to know Canadian Oil Sands, particularly should it pull back below $40.
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