The Oil Sands: Profiting from a Misunderstood Patch in the Oil Complex

People have found investing in oil exploration/integrated and deep water drilling a great place to be, and with good reason. My intention is not point out any faults in these various patches of the oil complex, but to bring to light an often overlooked area. As all investors know, those who go overlooked in a bullish sector often produce higher rates of return down the road. I’m not saying this is the case with most of the oil sands, but I think it would be wise for those thinking oil will go back up over $100 or even $200 in the coming decade to investigate this promising field.

Though I acknowledge they necessarily will have lower operating margins than most oil companies, oil over $100/barrel will mitigate this concern. One has to realize the enormous reserve base of the oil sands, allowing these companies to produce larger quantities of oil for a longer periods of time to a substantial degree. If that doesn’t spark your interest, there are several companies that have an oil sands operation to complement their flagship operations. The three largest projects in the Oil Sands are Synacrude, The Suncor Mine and The Albian Sands. They all continue to grow output year after year which is very significant as many oil companies' production is dropping off in the face of peak oil.

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My favorite companies that are engaged In oil sands production are Suncor (SU) (mostly due to their purchase of Petro-Canada (PCZ) with its 100% Mckay River interest and 12% interest in Synacrude) and Canadian Oil Sands Unit Trust TSX (COSWF.PK), due to its valuation. Other major oil sands producers planning to increase production include Royal Dutch Shell (RDS.A) (to 770,000 bbl/d (122,000 m³/d); Syncrude Canada (to 550,000 bbl/d (87,000 m³/d); Suncor Energy (to 500,000 bbl/d (79,000 m³/d) and Canadian Natural Resources (CNQ) (to 500,000 bbl/d (79,000 m³/d). If all these plans come to fruition, these five companies will be producing over 3.3 million bbl/d (500,000 m3/d) of oil from oil sands by 2028.

Disclosure: Long SU and COSWF.PK (Canadian shares).

Comments

[Mad Hedge F...:]

Only if you have no conscience. Anyone who has any illusions about the Canadian tar sands business should take a look at the March issue of National Geographic, not normally a prime source of financial and economic news for me. I’m not normally a big time environmentalist, but just looking at the glossy, eye opening pictures tells you that this is this an ecodisaster of Biblical proportions. A $50 billion investment by several firms over the last decade is now producing 750,000 barrels/day, and another $100 billion was headed north before prices crashed last year. You have to cut down a whole forest, remove two tons of peat, then another two tons of sand, and burn 100 barrels of oil equivalent to heat rivers of water to steam, just to produce a single barrel of oil. This gives you the world’s highest production cost, thought to be $80-$100/barrel. There are now 50 square miles of sludge ponds in Northern Alberta leaching a witch’s brew of poisons into the water supply, which has caused the local cancer rate to explode tenfold. We’re not just talking about a few sick ducks and fish here. Canada is the largest foreign supplier of oil to the US, accounting for 19% of the total, and half of that is coming from tar sands. One can only assume that the whole industry was built as a hedge against some Third World War, Armageddon type total cut off of all foreign crude supplies that would drive prices to $500/barrel, making all of this hugely profitable. Maybe the owners think they can get away with this because it is in the middle of nowhere. An army of lawyers about to hit these projects with a tidal wave of litigation think otherwise. After looking at these pictures and analyzing the numbers, you have to ask if it is really worth it, just so I can drive my Hummer to Walmart.

Jul 07 04:19 PM

[Hyperinflation:]

Its not like I can change what will happen will the dead fish, tress cut down, etc. I'm just saying if you believe oil is going back over 100 again, the oil sands will be extremely profitable for a long time to come. Many products are increasing output each year and significantly less cap-ex needs to spent going forward. Production costs aren't $80-$100! You obviously pulled that out of thin air. The Canadian Oil sands trust has production cost of $42 a barrel while others have slightly higher cost around 45-48. The highest I've come across is $52.

I didn't write this because I want all that land destroyed but a way to make money. I think cigarettes kill people, but I would buy a cigarette company. I would but a car company if i could make money, and cars kill a substantial number of people each year. Lawyers will not get involved with this because Canada is a natural resource country and they know the sands will be an integral part of their future. They also don't have a ridiculous judicial system as in the U.S. As for the trees did they own the land? Or the government? Should it be the latter, then go ahead, why should the government own anything to begin with? Like these companies, I pay taxes and would love to exploit so called public goods. The government has no right to tax ( as it infers no ownership of self) , just as it has no right to own anything. Perhaps you should be blaming the government and pushing for private property rights. This would have prevented any destruction of trees, ponds, etc.

Jul 07 06:13 PM

[Hyperinflation:]

I don't see how that relates to the article or my response. Of course Oil could go to $50 and it could theorhetically go to $10. If you play that game of trying to predict short movements, you are bound to lose. I am talking about these as investments not trades. If you're so sure that it will drop significantly and it sounds like you are get extremely leveraged and sell futures. I would rather be dollar cost averaging positions and then possibly buying futures should oil go to 45 or so.

Jul 07 06:44 PM

[Uncle Pie:]

Another way to look at it: in 2008 Syncrude produced 105 million barrels of oil, and unfortunately, inadvertently, caused the death of about 1500 ducks. Indiana-based Maple Leaf Foods, meanwhile, produced no oil and caused the death of about 15 million ducks (they are in the poultry business). Some environmentalists like to call oil produced from bitumen "dirty" but the fact is that the total carbon produced by all the oil sands projects in Canada equals about 1/50th, or about 2%, of the carbon produced by North America's coal fired power plants, according to a speech given by Stephen Harper, Canada's prime minister. "Dirty" oil? that's a little like the pot calling the kettle black, isn't it?
(the author owns shares of cnq, coswf and pcz).

Jul 07 07:40 PM

[Uncle Pie:]

Correction: that should be Maple Leaf Farms, not Maple Leaf Foods.
sorry.

Jul 07 07:41 PM

[bigmoney:]

@ Mad Hedge F

I also saw that National Geographic. What confuses me is the chorus of peak oil deny'ers, even with the oil majors are searching the far end of the globe for oil. Deep water, polar, war zones, sands, shale, etc. If oil was so abundant, then we could just sink some additional rigs in West Texas and get the entire world into V8 powered SUVs and a suburban way of life.

Jul 08 12:33 AM

[derryl:]

Mad,
Mining is a physical activity that requires removing whatever is in the way of the resource. The steam assisted gravity fed tarsands projects have the footprint equivalent of conventional oil wells while the stripmining operations disrupt a much larger area. Suncor, Syncrude and the other large operations are massive undertakings.

Yes, there is some leaching when failsafes fail, but the cancer and other "devastation" numbers you used are hysterical rather than real. Like open pit coal or copper mining, once the resource is extracted the land is restored to close to its original condition. Hydro, a 'green' energy, requires building dams and flooding 100s of square mile of land for reservoirs. Tarsands are far less environmentally devastatng than hydro reservoirs. Windmills kill far more birds every year than tarsands tailings ponds ever will.

If you don't like mining because it's so evil and polluting then stop using resources that can only be acquired by digging up the ground. The hypocrisy of National Geographic, flying around the planet to do exposes on the companies whose product--oil--fuels the planes they ride in, would be appalling if I had any outrage left for green hypocrites.

Jul 08 02:40 AM

[Quicksilver...:]

Although the National Geographic tried to shock people investors should take the time to do their own due dilligence. The fact is that less than 20% of oilsands recovery is done thru mining, the vast majority of the projects are insitu (in place -- in the ground). PLEASE take the time to understand the whole issue.

Jul 08 09:27 AM

[Jimbo:]

Mad Hedge: I was a subscriber to National Geographic for more than 35 years. I also rode a bicycle to and from work most days for 19 years. We have composted our household garbage for more than 30 years. We use a "solar dryer"(clothes line).We have a solar water heater. I drive a Subaru that gets 25 mpg around town and up to 32 on cruise control on the highway. I dropped National Geographic when the editor turned it into a one sided political screed. I am also a long time investor in Canadian Oil Sands but also several other Canadian energy companies. The in situ method , noted by previous commenters, is being employed by other Canadians I own. I fear the "TUGs" (totalitarian utopian greenies) want to bomb us back to the 16th. or 17th. century where sails, old fashioned windmills, horses and mules and humans provided the energy. If the TUGs succeed, the chaos and social unrest will be indescribable.

Jul 08 11:46 AM

[cyberclark:]

Wow!
I agree with the author that COS.UN OR COSWF.PK and SU (suncore) are probably the most undervalued stock in the market today. It won't take 100.00 to bring the profits up.

Alberta charges these guys the lowest royalty rates in the world! For instance their bench mark of 19% Canadian$ flies in the face of 30.00 US royalty taken by either Saskatchewan or BC. Or for that matter the 19% US taken in the Montana basin.

Alberta is effectively paying these companies to take the resource away! How can that not be the best deal on the board??

As for the dam ducks and National Geographic; the ducks got more press than Obama while most are killed off by lead shot and wind farms which the "greens" don't want to talk about;National Geographic is sensational yes but factual, far from it.

Jul 08 02:26 PM

[whisperonth...:]

How about we replace those ducks with Canada Geese? We have an abundance of them here in Michigan. They're everywhere, and cities are trying all manner of ways to get rid of them.


On Jul 07 07:40 PM Uncle Pie wrote:

> Another way to look at it: in 2008 Syncrude produced 105 million
> barrels of oil, and unfortunately, inadvertently, caused the death
> of about 1500 ducks. Indiana-based Maple Leaf Foods, meanwhile,
> produced no oil and caused the death of about 15 million ducks (they
> are in the poultry business).

Jul 08 05:29 PM

[whisperonth...:]

While we're at it, Michigan would probably be willing to send some deer, too.

Jul 08 05:30 PM

[toomuchgas:]

Lots of risk in the oil sands business justifies the low valuation, not even mentioning the trust tax and a carbon tax.

Jul 13 09:31 AM

[Hyperinflation:]

Why do say there is lots of risk in the oils sands? I agree at first the capital requirements to begin projects was rather steep, but that is coming to an end as cap-ex requirements are substancially lower going forward. The risk is in the feasibility, as in whether or not it is profitable at any given time. This risk , however, has become the sands comparative advantage in that there reserves will soon be second to none. If You think OPEC had major influence, wait 3-5 years , and this group of oil companies will have even greater influence.
Additionally there are no trusts companies involved (at least to a meaningful degree) in the sands. Canada treats their resource companies like kings and rightfully so. I would argue they have tax advantages relative to others in the complex.

Jul 14 06:28 PM