In my previous articles, we analyzed the top oil companies by marketing capitalization, oil and gas diversified companies, oil exploration and production companies. In this article, we continue looking at the world's largest energy companies. We will look at four oil and gas companies involved in unconventional oil sources from oil sands, - Suncor Energy Inc. (SU), Imperial Oil Ltd (IMO), Husky Energy, Inc. (HUSKF.PK), and Canadian Oil Sands Ltd (COS). Gas E & P companies restrict their operations to "upstream" activities, meaning finding and producing oil and gas and leaving the refining and distribution to other companies. Integrated Oil & Gas companies engage in both upstream exploration and production and downstream refining and distribution as well as midstream pipeline operations. We will look at some historical performance indicators, forward growth estimates, and macroeconomic issues in an attempt to determine which the best winning bet is right now.
Here are the four companies for our analysis:
Data from Morningstar on January 14, 2013
What Does 2013 Have in Store for Oil Sands Exploration and Production?
In October of 2012 the International Energy Agency cut its 2013 forecast for oil demand, driving down the price of oil. The agency produces monthly forecasts and in December the forecast was raised, although the agency still sees a "sluggish" environment. Prices should remain relatively stable as the US shale gas boom has raised global oil supplies to comfortable levels.
The price of oil is critical for oil sands producers as some experts have called oil sands the "world's most expensive oil." The Canadian National Energy Board claims oil must be between $85 and $95 a barrel to justify the cost of oil sands production.
Pipeline expansion is perhaps the most critical issue facing the industry in 2013. In short, the existing pipeline system is inadequate to move current supplies of conventional and unconventional (oil sands) Canadian oil to markets. Although the Keystone XL Pipeline through the US gets all the headlines, there is need for more east-west pipelines in Canada as well.
Suncor Energy is Canada's largest oil sands exploration and production company. Suncor is integrated and has conventional oil and gas assets as well as wind-power and biofuel assets. The diversification of energy assets along with the company's refining and marketing operations provide some safety lacking in oil sands pure plays.
As an example, consider the recent announcement from Exxon-Mobil about its plans to tap the estimated 660 million to 1 billion barrels of oil in the Hebron Field off the coast of Newfoundland. Suncor Energy is a 22.7% partner in this project. In addition, Suncor's refining and marketing division accounted for 60% of the company's 2011 Full Year revenue while oil sands accounted for 28%.
Imperial Oil is another integrated oil company that benefits substantially from its downstream refining operations. In the company's recent Q3 earnings release, the profits from downstream activities more than made up for the small drop in upstream income. The result was a 5% increase in year over year revenues and a 20% EPS beat of analyst estimates.
Imperial is actually 70% owned by Exxon-Mobil. Imperial's future growth is pinned to its substantial oil sands assets. The company recently acquired a 50% stake in Canadian shale oil and gas explorer and producer, Celtic Exploration Ltd. Imperial is already Canada's second largest integrated oil producer and should the deal get approval, the addition of shale gas and oil assets would benefit the company substantially. The transaction is somewhat complicated as Exxon-Mobil will be the actual buyer and Imperial will then acquire a 50% stake from Exxon.
Husky Energy is yet another integrated Canadian oil and gas company, albeit a much smaller one. Husky's trailing twelve month revenue stands at $24,478 mil, while larger rival Suncor shows almost twice that at $40,045 mil, and Imperial has $31,508 mil in revenue. The company's principal assets are in Western Canada. Its smaller size makes it more vulnerable to the pricing and pipeline concerns plaguing oil sands explorers and producers.
If there is a reason to take a gamble on Husky Energy it would be the company's exposure to offshore oil and natural gas fields off the coast of China. Husky has a 40% stake in an oil field and operates three gas fields in the South China Sea in partnership with China National Offshore Oil Company.
However, the current and forward valuations for Husky are the highest of any of the four companies in our table, with a P/E of 14.5 and a Forward P/E of 14.2. Right now it appears the other companies represent safer investments.
Canadian Oil Sands is the only pure-play oil sands producer in our table with a 36.74% interest in the Syncrude JV. Note that Imperial Oil has a 25% interest in the JV and Suncor holds a 12% stake.
With a current dividend yield at 6.8% and a 5 year dividend yield history of 7.8%, Canadian Oil Sands looks like a winner for any income investor. In the long term demand for oil makes the company attractive. However, there are short to medium term issues to think about. On November 30, 2012 Canadian Oil Sands announced an ambitious capital expenditure program for Syncrude of $1.3 billion, with the forecast for 4% production growth in 2013. In the same announcement, company management cautioned that pricing discounts for costlier oil sands versus US shale oil will continue. The company anticipates its oil sands output will bring $5 per barrel less on average than West Texas Intermediate (WTI), the U.S. benchmark per barrel price.
Canadian Oil Sands is at further risk because it lacks the refining capacity of its integrated partners. The lower oil prices we are currently seeing work to benefit refiners and punish producers. Add to this the fact that the kind of "heavy" oil from oil sands is costlier to produce and sold at a discount to lighter grades. The final problem unique to Canadian Oil Sands also stems from lack of refining capacity. Without its own refineries, this company must rely exclusively on pipelines and other forms of transport which are currently inadequate to carry the load.
In a year end article the respected Financial Times proclaimed Canada's oil becomes cheapest in world amid glut in Alberta. The article cites supply and refinery problems along with the critical issue of pipeline capacity. Some experts see the pricing discount continuing in early 2013. Certainly investors for the longer term should monitor developments, especially regulatory approval of added pipelines like the Keystone XL pipeline in the US. However, note that all four of the oil sands companies in our table are currently returning equity to their shareholders above 10% and all are paying dividends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.