Seeking Alpha
Long/short equity, hedge fund manager, portfolio strategy, research analyst
Profile| Send Message|
( followers)  

Over the last month, I have written a couple articles discussing my bullish stance on Bakken oil plays. And although my stance remains aggressively bullish on the topic, it is important to keep a diversified portfolio in order to mitigate risk and be in a position to benefit from an overall North American oil boom. As the Bakken and Eagle Ford Formations have attracted the majority of investors' interest, there is another oil-rich region that is producing wonderfully. Oil investors should position their portfolios to include investments in companies operating in Western Canada, specifically Alberta.

The northern Alberta reserve is the 3rd largest deposit in the world. Alberta combined with the Bakken and Eagle Ford will provide 40% of the new supplies in the next five years, as global output surges by 8.4 million barrels a day according to the International Energy Agency (IEA). North America alone is expected to increase output by 3.9 million barrels a day during that same time period. The IEA also says that Canada's oil sands and U.S. tight oil plays will contribute more than one-third of new supplies to global markets between now and 2018.

The Big

Several oil giants that I have mentioned in previous Bakken articles are already active in Alberta and other regions of Western Canada. ExxonMobil (NYSE:XOM) just recently began production at their Kearl Oil Sands Project in Alberta which is expected to produce 4.6 billion barrels of recoverable oil in the next 40 years. The project will produce 110,000 barrels a day later this year and that's expected to double by 2015. The site is operated by Imperial Oil Ltd. (NYSEMKT:IMO), which is 70% owned by ExxonMobil. Richard Kruger, Imperial's CEO, stated, "Kearl is the largest project we've ever undertaken and the beginning of a period of substantial growth for the company that will see us double production to more than 600,000 barrels a day by 2020." ExxonMobil also agreed to spend $2.6 billion to takeover Celtic Exploration Ltd. in October, 2012. Celtic had extensive acreage in the Alberta region.

ConocoPhillips (NYSE:COP) is one of the top three natural gas producers in Canada and is the largest operator and producer of the Deep Basin region in northwestern Alberta. Other regions of Alberta with operations for ConocoPhillips include the Rimbey and O'Chiese, Southern Plains, Kaybob and Edson, Northern Plains, and the Foothills. In 2012, three state-run Indian companies had their eyes on some of these assets and offered a combined $5 billion for six of the Alberta properties. That's proof of just how valuable the Alberta assets can be for ConocPhillips. In 2011, the Company announced plans to invest $1.5 billion in oil sands assets in Alberta that year alone.

Chevron (NYSE:CVX) is another oil giant holding a stake in Alberta and actually just recently moved in to acquire the interests held by Encana Corp. (NYSE:ECA) and EOG Resources Inc. (NYSE:EOG) to become a 50% interest holder and operator of the Kitimat LNG Project. This will ship 10 million tons of super-cooled gas per year for 20 years to energy-needy markets. Chevron took the job of project operator away from Apache Corp. (NYSE:APA). In 2012, net daily production from Canadian operations for Chevron was 25,000 barrels of crude oil, 4 million cubic feet of natural gas, and 43,000 barrels of synthetic oil from oil sands.

Occidental Petroleum (NYSE:OXY) just acquired a 15% interest in the Joslyn oil sands in northeastern Alberta for $500 million from Enerplus Resources (NYSE:ERF). The Joslyn oil sands is operated and controlled by French oil and gas giant Total SA (NYSE:TOT). This move is both significant for Occidental and positive for the entire Alberta region because Occidental, unlike its bigger rivals, had no refineries or interest in Canadian oil sands. Occidental has openly been described as being in the oil recovery business rather than the oil discovery business. So, if they are making moves to become more active in the Alberta region, it's certainly worth taking notice.

The Medium

TransCanada Corp. (NYSE:TRP) has been investing heavily in power plants in Alberta since 2001. Their assets include 5 power plants with over 2,000 megawatts of generation capacity. Their plant ownership along with their power purchase arrangements allow this energy infrastructure company to provide power at a fixed price from one-month to one-year contracts. TransCanada's Keystone Pipeline is another advantage as this 2,150 mile system transports crude oil from Hardisty, Alberta to key markets in the American Midwest. This is a significant advantage for the Company as I will discuss later in this article the challenges of transporting oil from the region.

Suncor Oil (NYSE:SU) has been in the news lately but not on the company's terms. Just a couple months ago, a waste-water pipe at a Suncor oil sands plant leaked into a pond of treated water that flowed into the Athabasca River. However, Suncor rebounded from the incident and announced just last month that Centrica, U.K.'s largest household energy company, and Qatar Petroleum agreed to buy their natural gas fields mostly located in southern and central Alberta for $981 million. And similar to how Occidental made their first move into Alberta, this is Qatar Petroleum's first investment in an overseas gas field. Again, a move worth taking notice.

Encana Corp., Canada's largest producer of natural gas by volume, has had a busy start to 2013. First, the Company announced that they had partnered with PetroChina (NYSE:PTR) to develop natural gas in the Duvernay lands in Alberta. Encana has already drilled nine wells in its 445,000 acres in the Duvernay and has been inking several joint ventures in recent years to develop its huge resource base more quickly. A study by the Alberta Energy Resources Convention Board and Alberta Geological Survey said the Duvernay formation contains 443 trillion cubic feet of total gas, 11.3 billion barrels of natural gas liquid, and 61.7 billion barrels of oil, making it one of the continent's largest shale prospects. Encana topped things off by having their CFO, Sherri Brillon, receive the 2012 Alberta Oil C-Suite Energy Executive Award for top financial officer at a Canada energy company.

Imperial Oil was mentioned earlier along with ExxonMobil. However, Imperial deserves its own section as its Cold Lake operation is the largest thermal in-situ heavy oil operation in the world. Cold Lake produced more than 160,000 barrels of bitumen in 2011. Bitumen is an oil-based, semi-solid hydrocarbon product produced by removing the lighter fraction (such as liquid petroleum gas, petrol and diesel) from heavy crude during the refining process. In October, 2012, Cold Lake produced its one billionth barrel, the only in-situ operation in Canada to have achieved this milestone.

The Small

I'm sure you are familiar with all the companies I mentioned in "The Big" section and might have heard of a couple in "The Medium" section. However, I guarantee hardly anyone is familiar with the next company I am about to discuss. When I compose articles I like to provide insight and information on large, medium, and small companies operating in the same space to reach all types of investors. And although investing in micro-caps is often times more risky as many statements are considered forward-looking, a greater potential reward also exists should you find the right one.

Aroway Energy Inc. (OTCQX:ARWJF) is a junior oil and gas company operating in western Canada, primarily Alberta and Saskatchewan. Through a joint venture partnership, Aroway has assembled a land package with 110 sections covering 70,400 acres in the Peace River Arch of Northern Alberta. The Company also has a 100% working interest on a 3D seismically defined exploration property in Central Alberta and highly economic heavy oil producing property in West Hazel, Saskatchewan. In October, 2012, Aroway announced a 526% production increase reaching 146,269 BOE compared to 23,351 BOE for the same period in 2012. The company also reported revenues of $12,018,074, which was a 1,112% increase from 2011. Net income increased by $3 million in 2012 and cash flow from operations jumped by $4.6 million. That's amazing production and progression for a company trading around $0.25. That one year performance is enough to have me watching this company very closely.

The Alberta Challenge

The so-called break-even price for Alberta heavy oil varies between $65 and $100 a barrel. But in recent months, Alberta producers have been getting as low as $45 in part because there isn't sufficient pipeline capacity to move the oil to world markets. This is why TransCanada's Keystone Pipeline is so significant.

We are already beginning to see a weaker Canadian dollar as a result of the resource slowdown. Although this should bode well in the long-run for Canadian manufacturers who export their goods, it's a scare that the entire country, not just Alberta, is dealing with. As a result, Ottawa has already modified or eliminated environmental rules that could hurt the business of resource companies. A free-trade agenda with Japan is another strategy to help curb the effects of a resource slowdown. Yet, for oil and gas companies, it all comes down to transportation. There continues to be a strong push for more pipelines to move oil and gas more easily to Asia and the U.S. This is a point that investors should also be aware of when looking to bulk up their holdings in the transportation sector.

Source: A Diverse Oil Portfolio Should Include These Companies