In my recent article, I expressed 10 reasons to be long Canadian Oil Sands (OTCQX:COSWF). It did not take long at all for an attempt at a rebuttalfrom Fincom Investment Partners. While I always enjoy reading a variant view, I stand by my position in this case.
Fincom claims that COSWF is a high-cost producer. Yet, the company reports its cost per barrel of $41.48 CAD. How does this compare with, say, oil shale producers in the Bakken?
From a recent Reuters article (emphasis mine):
"We've seen tremendous variability in cost and well performance between operators as each tests different methods of well completion," said Jonathan Garrett, analyst at Wood Mackenzie. Among the factors that can affect costs: lateral length, stage count, proppant volume and type, fluid volume and type, sleeves versus plug-and-perf.
Wood Mackenzie has an overall Bakken break-even price of $62 a barrel at current well costs, Garrett said. But for high-quality parts of the formation such as the Parshall and Sanish fields, that number goes down to the $38-$40 range.
While producers can break even at just below $40 a barrel in most places, the Bakken needs prices in the $80-$85 range to attract capital from other shale areas.
Reuters article figures are in USD, incidentally. So the Bakken cost per barrel actually appears higher than that of COSWF, except for the high quality parts of Bakken, where the cost is similar.
Then Fincom states that "WTI prices are going lower. We don't pretend to be oil price forecasters, but..." and then proceeds to forecast the price of WTI going lower. However:
- Shell (RDS.A)(RDS.B) recently took a $2.1bn writedown, mostly related to its tight oil assets in North America, and said it had launched a strategic review of its shale portfolio there.
- Shell's experience has been echoed by others. Oil companies who rushed to buy acreage in Ohio's Utica shale a few years ago have discovered the rock is not as porous as in other formations such as Texas' Eagle Ford or the Bakken, and there is less natural pressure underground to help force the oil out. Many companies are now trying to sell their holdings there.
- Behind the headlines boasting of a U.S. oil boom, producers have been grappling with rapid production declines at aging shale-play wells.
My question, therefore, is: can Fincom really be sure of the direction of WTI prices? By the way, oil sands production does not suffer from rapid production declines.
Fincom continues to state that "While most newer shale producers have a chance to reduce costs via improved technology, COS is going to remain a mostly old-style open pit mine, mined by men with shovels and trucks, big ones indeed, but still capital and labor intensive, with few opportunities for major cost improvement."
Most mining costs can be related to:
- energy and
There has been significant and similar labor cost inflation in both mining and drilling (I lived in North Dakota for 5.5 years until very recently and I have seen labor cost inflation first hand).
My common sense suggests that energy cost inflation will probably affect mining and drilling similarly.
Now for the equipment... Suncor (SU) is working to reduce oil sands mining costs with robot trucks. I quote: "Using autonomous haul trucks can increase productivity and reduce fuel and maintenance costs by 15 percent, John Meech, a mining engineering professor at the University of British Columbia who has researched the truck systems, said... in a phone interview." Incidentally, using robot trucks significantly lowers labor costs as well.
Also take a look at many interesting technologies for bitumen extraction here. This is far removed from "men with shovels and trucks," isn't it?
Generally, oil sands crude is not as expensive to produce as it used to be.
Finally, Fincom mentions the "disappointing" performance of the company and the stock to date. To this, I say that it doesn't matter where the company (and the stock) have been, it only matters where they are going. I think the future for COSWF and its shares is bright in the intermediate to long term:
- No risk of wasting money on a dry well
- No rapid production declines
- No clear evidence that WTI should significantly decrease in price
- No significant per barrel cost disadvantage against shale oil
In the meanwhile, collecting 7% dividend is fine by me.