Like a lot of folks, I'm getting pretty sick of this Keystone XL pipeline issue.
I'm Canadian and to be honest I think the best thing for my country is that Mr. Obama NOT approve the pipeline. It would be a much needed wakeup call for my country.
This would be a wakeup call to tell us that it isn't smart to have all of our eggs in one basket. It would force us Canadians to get off our behinds and get a plan in place to send our oil to the Asian market that is going to be growing for the next 30 years.
I do think this pipeline will be approved, however. Because denying it is not going to accomplish anything but risk a safe, reliable source of oil for the United States.
I know there has been a lot of coverage now being given to the Unconventional Oil Revolution that has been going on in the United States. But the talk of the U.S. becoming oil independent is seems a little far-fetched to me.
I mean, have you seen the graph from EOG Resources (EOG) below?
The red portion is the amount of oil that is imported every day by the United States. That little blip up in the blue portion of the graph is the huge surge in production that has happened over the last couple of years.
The fact is the United States needs Canadian oil and is going to for a long, long time. The alternatives to Canada are the Middle East and Africa, and there is no guarantee that all of that oil won't get locked down by China and India as well.
The craziest part of the argument against the Keystone XL is the idea that there is a big risk of an oil spill because of it.
That means that the Keystone XL adds 1,179/95,000 = 1.2% to the amount of pipelines in the United States today.
It is a rounding error when it comes to the total amount of pipeline, and since it is decades newer than a lot of that pipe, a risk of a spill is very remote.
The Dirty Tar Sands
The part of the argument against the pipeline that has merit is that denying it would send a big message that it is time for the world to wake up and realize that taking care of the planet is our responsibility.
Even though I'm an oil man, I'm on board with our need to wake up and realize that we need to change our resource depleting ways.
But that doesn't mean I think the Keystone XL shouldn't get built.
There are two reasons why I say that.
Number one is that there is no viable replacement at this point to oil. We need it to run our economy and feed our people. The United States can't cut off that resource when we don't know if a better alternative is 10 or 100 years in the future.
The Unites States needs to secure that Canadian oil AND get to work on a plan to wean itself off of crude.
The second reason that I think the Keystone XL should get built is because denying it will have ZERO impact on whether not the oil sands is developed. Canada is going to produce that oil, the only question is whether we ship it east, west or south.
So while the focus has been on the dirty tar sands, I'm still comfortable that investing in companies that produce oil from them is a very good idea for the very long haul.
My favorite oil sands player is the big boy, Suncor (SU).
From a current production base of roughly 500,000 barrels a day, Suncor is planning to hit 1 million barrels a day by 2020. That is a CAGR of about 8% per year. Suncor doesn't have to go out and find new oil reserves in order to create this growth. There is no exploration risk.
If anything, there is a pretty likely chance that there will be technological improvements in oil sands development that increase the amount of oil that can be produced and expedite how quickly it can be done.
I think of the Suncor valuation like this:
· You buy 500,000 barrels a day of production at a very reasonable multiple of EBITA
· Growth in that production is virtually assured
· Technological improvements are likely to increase the amount of oil Suncor can develop and make it more economical
· The price of oil is likely to increase the value of production and reserves
· 7 billion barrels of 2P reserves against a 60 billion enterprise value is around $8 per barrel
· 20 billion barrels of contingent reserves
If you are bullish on oil and your conscience allows you to profit from the oil sands, then Suncor is worth a look.