Oil Sands Back in the Spotlight

Includes: COP, COSWF, SHI
by: Market Blog

By David Berman

After the news broke on Monday that ConocoPhillips Co. (NYSE:COP) had sold its 9% stake in Syncrude Canada Ltd. to China Petroleum & Chemical Corp. (NYSE:SHI) for nearly $4.7 billion (U.S.), one name in Canada’s oil patch jumped.

Canadian Oil Sands Trust (OTCQX:COSWF) rose about 5% on the news, and for a pretty good reason: If 9% f Syncrude was worth $4.7 billion, then Canadian Oil Sands’ 36.7% stake in Syncrude would be worth...a lot more. Indeed, the deal represents a 16% premium over the units’ closing price on Monday.

However, Jeff Meunier, an analyst at TD Newcrest, isn’t overly bullish. On Tuesday, he cut his recommendation on Canadian Oil Sands to “hold” from “buy,” although he raised his 12-month price target to $34.50 from $32 based on the company’s increased reserve and resource report announced in late March.

The reason for his tempered enthusiasm? Although the Concoco-Sinopec deal suggests that the trust has a higher valuation, the price paid by Sinopec represents a premium over Canadian Oil Sands’ net asset value, in Mr. Meunier’s opinion. In other words, Sinopec paid more than Syncrude is worth intrinsically.

However, investors who love rising distributions have something to look forward to. Mr. Meunier believes that the transaction will nudge Canadian Oil Sands into raising its payout.

“We believe the company was maintaining current levels, in part, to preserve capital in the event of a successful bid for ConocoPhillips’ stake in Syncrude,” he said. “Looking forward, we believe the company will review the current level of distributions ($0.35 per quarter) given the outcome of the sale and current strong crude oil prices relative to its budget (and guidance) and consider an increase.”

According to Bloomberg News, a consensus of analysts believe that Canadian Oil Sands will boost its quarterly distribution to 45 cents (Canadian) a unit from 35 cents. However, the trust’s payouts have been rocky in recent years. The payout hit a high of $1.50 in 2008, when the price of oil was at a record high above $140 (U.S.) a barrel. The payout was then cut twice, to a low of just 15 cents (Canadian), when oil prices tumbled with the downturn in the global economy.

Among some of the other analysts’ revisions, UBS raised its recommendation on Canadian Oil Sands to “buy” from “neutral” and raised its target price to $35.50 from $30. And Canaccord Adams maintained a “buy” recommendation but raised its target price to $34 from $32.