UTS Energy: Risky Play?

The stock price of UTS Energy (UEYCF.PK) has come down drastically from about $6 in July to just $0.87. This has left UTS with a market cap of $412M with the following key balance sheet items:

• Cash: 335M
• Property: 460M
• Debt: 0
• Total Liabilities: 113M

Not fully reflected on the balance sheet (for conservative accounting reasons) is that the company owns an estimated 1.5 billion barrels of oil in the form of oil sands. With its cash position representing over 80% of its share price, plus its oil sands reserves, this company has the appearance of a great value play on paper. Unfortunately, there are mitigating circumstances which make this a risk!

One problem is, its first project is not scheduled to come online until the end of 2011, with the next two scheduled to start around 2015. Until then, the company will be spending its cash and fast: based on its cost estimates, the company will run out of cash in 2009, and therefore needs financing soon.

Although we have an estimate of the amount of oil the company will develop, what will the price of oil be when these projects come online? Along with most value investors, we don't pretend to know what the oil price will be at that time (although several months ago I did bet my friend Charles who owns AltEnergyStocks.com that the oil price will be less than $115 in five years).

The initial costs, however, (before a dime in revenues is received) are quite high. The estimated Phase I costs of UTS' first project (for which UTS owns a 20% share) are over $15 billion, meaning this company will be spending a lot of cash in the next few years with little certainty as to its returns.

For someone who can reliably predict energy prices (if such a person exists!) and who therefore understands the value of the oil sands this company owns, this may be a great investment. However, we only invest in companies we understand well, and so despite the current strong balance sheet and low P/B ratio, this company appears to be a risk for those of us who prefer to swing at sure things.

Disclosure: None

Comments

[Steven Ward:]

The highest sale for undeveloped oil sands in the ground has been Oxy's purchase of Enerplus' share in the Joslyn Project. at a price of $1.57 a barrel. Most oil sands go for 50 cents to a dollar a barrel. The Joslyn sale was done at much higher oil prices, well over $100.00 per barrel. So it is doubtful that UTS will get a $1.57 if they sold out and distributed their share of the cash to shareholders. If UTS did sell their oil sands assets for the previous high then they would receive about $4.90 per share, considerably higher than the stock is now.

If they sold at a low of 50 cents per barrel, that would translate into $1.58 per share. Assuming UTS doesn't receive adequate financing for future projects selling out would be the prudent thing for shareholders.
Current estimates of costs are 80 to 90 dollars a barrel for a 10 to 12 percent return on oil sands projects. UTS has to ask itself if it is worth it.

UTS is in a good poition to sell to well heeled partners involved in the project. UTS can sell for some cash now and lower its developmwent costs and retain a smaller percentage or sell all its assets for a lower price and retain a royalty on future net production or sell all outright at the highest possible price.

It is doubtful UTS can achieve the financing necessary to stay with the project with production so far away. UTS should be thinking of its shareholders and how to get them money now.

2008 Oct 20 10:17 AM

[Lexy:]

This company is toast. It has never produced a single barrel of oil and has only been adept at pushing its schedule back year after year, from 2009 to 2012. The reality is that they have not and will not ever acquire the billions necessary to fulfill their obligations to the partners esp. in this credit environment which is compounded by the freefall in oil prices. Their best hope is m&a. The most realistic outcome is insolvency.

2008 Oct 22 04:58 PM