The International Energy Agency has estimated the Alberta Oil Sands to have maximum recoverable reserves of 178 billion barrels, placing Canada second only to Saudi Arabia when recoverable reserves are ranked. In this article we will present several stocks with exposure to various facets of the Alberta oil sands business, with significant catalysts for future growth. In the interests of full disclosure, many of these stocks have poor trading volumes on the OTC markets, so the interested prudent investor will purchase them on the Canadian Exchanges.
For the US investor, Canadian stocks offer a currency hedge against a declining US dollar. One only needs to look at the Canadian and US issue of a given stock to see this. For example Canadian National Railway (CNI) would have returned over 460% to a US investor compared to 360% for a Canadian investor over the past ten years. All of the below stocks offer diversification to other currencies as well, which is advantageous as a result of the interconnected nature of the US and Canadian economies. We are large supporters of owing few companies in our portfolios, understanding them fully, while still being diversified as a result of the business segments or markets the company operates in.
1) Computer Modelling Group (OTC:CMDXF): Beyond being a play on the Alberta oil sands, CMDXF is a play on the increasing complexity of hydrocarbon recovery around the globe. CMDXF is the world leader in modeling software for unconventional oil and gas, including oil sands. The company is globally diversified, headquartered in Calgary, Alberta, but with operations in 56 countries serving 540 customers. 38% of revenue in fiscal 2013 was from the Canadian market. Over the past ten years, CMDXF has appreciated over 5000% (not counting dividends), and in the past five, the dividend has more than doubled. The company has no debt and a strong financial position; net profit margins are over 30% and the company maintains its industry-leading competitive advantage by strong funding of research and development.
2) Canexus Corporation (OTC:CXUSF): Canexus is not a pure play within the oil and gas industry, it has extensive operations within the sodium chlorate and chlor-alkali fields in North and South America. However growth is anticipated to be catalyzed by its Alberta terminalling operations. A former chlorate plant has been transformed into a storage and terminalling facility in Bruderheim, Alberta, as a result of its strategic location on both the Canadian National and Canadian Pacific (CP) lines, while being pipeline-connected. As a result, CXUSF is a play on the increasing role of oil transport by rail in North America. They have recently entered into a long-term contract with Inter Pipeline (OTC:IPPLF) for the delivery of bitumen blend from the Cold Lake pipeline for loading into train cars. The OTC issue currently has a yield of almost 9% and the stock has appreciated over 100% in the past 5 years and the payout ratio is 78%. The past six months have seen a 20% decline in share price as a result of North American pricing of chlorine and sodium hydroxide and may signal a good entry point.
3) Calfrac Well Services (OTCPK:CFWFF): Yet another globally diversified company, CFWFF has operations in Canada, the US, Mexico, Russia, Colombia and Argentina. It specializes in oilfield stimulation services including hydraulic fracturing, cementing and coiled tubing, allowing increased oil recovery margins. The dividend has increased ten-fold over the past five years from a biannual $0.05/share in 2009 to $0.25 quarterly for a yield at today's price of a bit over 3%. During the same period the stock has appreciated over 250%. Their financial year 2012 reported an assets to liability ratio of greater than two with 4% year-over-year revenue growth in the most recent year. Beyond their exposure within Alberta, their exposure to unconventional oil plays is increasing in the United States in the Bakken and Niobara regions. While Canada and the US are the world's largest current hydraulic fracturing markets, Calfrac is taking this technology to its operations in Latin America and Russia, and this is expected to show significant growth in the future.
4) Inter Pipeline (OTC:IPPLF): The oil sands transport business of Inter Pipeline provides a quarter of revenue and almost 40% of EBITDA in 2012. While they also operate conventional pipelines and natural gas liquids extraction, international diversification is with the fourth largest bulk liquids storage business in Europe, offering exposure to both the Euro and Pound Sterling. The company has only recently converted into a corporation, making it available to non-Canadian investors, which is likely to be a significant catalyst for price appreciation in the near future. The oil sands transport pipelines connect to both Canexus' terminalling facility, as well as to the TransCanada (TRP) mainlines, making Inter Pipeline a play on larger crude volumes from the Alberta oil sands, regardless of whether new pipelines such as Keystone XL or Northern Gateway (ENB) are approved or whether expansion of oil transport by rail continues in the near future. At today's price IPPLF pays a 5% dividend which has been grown every year in the past ten years. Over the same period of time the share price has appreciated 380%.
Our two favorite plays from the above on the Alberta oil sands are CMDXF and IPPLF. As improving recovery from unconventional oil sources such as the oil sands become more common, as industry leader CMDXF stands to greatly profit. IPPLF, regardless of your thoughts on pipeline approval and rail transport, will stand to gain on increased transport volumes to terminalling facilities or mainline pipelines. If you believe that rail transport of oil will be increasingly important, CXUSF is a play on this, however our hesitation in investing in CXUSF is the significant exposure to commodity chlorine and sodium hydroxide prices. Finally, CFWFF is a play on the expansion of hydraulic fracturing in the extra-North America markets, while deriving core income from the stable Canadian and US Markets.