NPV Increase for Imperial Oil, Suncor and Canadian Oil Sands Trust (IMO, SU, COSWF, RDSA)

Net present value [NPV] has increased more than 20% for buy-recommended Imperial Oil (IMO), Suncor (SU) and Canadian Oil Sands Trust (COSWF) as we raise long-term real price to $60 a barrel from $50 for light, sweet crude oil. NPV increased a median 9% for buy recommendations as we make no change in long-term natural gas price of $10 a million btu and long-term refining margin of $10 a barrel.

Estimated present value of conventional oil production increases 20% in the U.S., Canada and Europe and 10% in most other countries where the government take rises faster than oil price. We don’t raise values in Russia at this time and we write off values in Venezuela and Ecuador. In a few cases we have adjusted value outside of oil production for recent performance. Six-year futures for oil of $71 a barrel partly ratify our long-term oil price. We continue to see a trend of a natural gas price at oil divided by five, but six-year futures have natural gas price at oil divided by more than eight. Thus, the long term may be a bit further away, leaving our natural gas price for NPV estimates at oil divided by 6. Current one-year futures for refining crack at more than $12 a barrel partly ratify our long-term margin estimate. McDep Ratios that range from 0.6 to 1.2 imply attractive investment potential.

Most Price Leverage in Oil Sands
The recent acquisition of Blackrock Ventures for more than US$2 billion by the Royal Dutch Shell (RDSA) affiliate Shell Canada, put higher values on undeveloped underground oil sands. Though our new estimates will be refined with time, we add present value proportionately more than price for Canadian producers. The value of mineable oil sands also rises more than price, but less than underground, or in situ, oil sands.

Net Present Value Affected by Financial Leverage
Companies with similar changes in business value may have different percentage changes in NPV depending on each company’s amount of debt. Yet debt levels are not high for oil producers compared to the increasing value of oil production. As a result the highest gainers in NPV tend to be those stocks concentrated on oil production in Canada, the U.S., China and Norway (see table Change in Net Present Value).

Present Value Approximated with Cash Flow Multiple
The mechanics of the analysis involve detailed projections of cash flow for the next twelve months taking into account historical results for the past few years for each stock. The Present Value cash flow multiple depends on reserve life in the same fashion as the discounted present value of future cash flow increases with the life of a project at a declining rate. The multiples are generally consistent with a real discount rate of 7% a year applied to constant real price and costs.

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