- The Canadian Oil Sands are immense..
- The oil sands industry is attractively valued..
- Lon- term dividend and value investors can find attractively priced investments now..
I am a long term, buy and hold Dividend Investor. Thus, I like to look, first for industries or sub industries that are poised for success over the next 20 - 30 years, and within the identified industry - look for great companies that pay an increasing dividend.
This article will present a thesis of why I think the Canadian Oil Sands Industry is poised for success into the future and why this is a good time, as an investor, to get in.
As we know, right now the elephant in the room is the Keystone XL pipeline 'debate' which has been a long, drawn out and insufferable process that is, in my opinion, acting to create great opportunities for the discernible investor.
As most are aware, President Obama has been stalling approval of the Keystone XL pipeline. It has been 'under review' for almost 6 years now. This has to be the most reviewed piece of infrastructure in the history of North America and there is still no end in sight as to when this will be complete. In fact, the Obama administration has just indefinitely delayed the approval on the day before Easter Friday.
For all intents and purposes the keystone pipeline is dead in the water.
Death by delay.
The delay of this one pipeline has been hurtful in the short term for the Oil Sands Industry, no question. Both in actual prices received, but more importantly, in investor perception in the USA where it has been getting a lot of air time in the media. However, in the medium to long term, it is my contention that this delay will, in fact, turn out to be a net positive for the Canadian Oil Sands. This is one half of the opportunity here.
The other half is the immense, strategic opportunity of the Canadian Oil Sands reserve itself.
The Canadian Oil Sands are the third largest reserves of hydrocarbons on the planet. That by itself, sounds impressive, but it is even more impressive than that once you dig in a little deeper.
Consider this, Saudi Arabia, who either occupies #1 or #2 depending on how the study determines size, has two factors working against it from an investors stand point.
- State owned companies so it makes it difficult to invest directly
- Saudi Arabia's reserves have not been independently measured since the 1970's
The other big guy on the block is Venezuela and from an investor's point of view, you don't want to be near any company that depends on hydrocarbons from there as Caracas has appropriated for the 'state' private oil extraction there, multiple times, just within the past few years. The political risk here is much too high.
In fact, when you look at the top 10 largest reserves in the world, only the Oil Sands in Canada offers both a growing recovery rate and a place where political risk is low and private enterprise is encouraged.
What this means is, if you are an investor that believes oil and gas are going to be needed into the mid to long term, then you have to be invested in the Canadian Oil Sands.
We all know that the shale gas and oil revolution in the USA has been a great thing, but even that pales in comparison to what the Oil Sands have to offer over the investment time frame. The recovery rate on shale is also short term in nature. That is, there is a constant exploration risk in the shale plays because of the quickly declining yield of the fracked wells. The Oil Sands, while having hugely expensive start up costs, are manageable after that and have almost zero exploration risks and costs after that - unlike the shale resource play, Canadian Oil Sands are long term investments.
There is no way around it - your portfolio demands that you have exposure to the Canadian Oil Sands. The good news is, if you aren't already invested, you have an unexpected friend in President Obama hanging a 'discount' sign on these strategic assets.
The Canadian Oil Sands are landlocked. This immense store of hydrocarbons is not near a shipping lane able to be loaded up on an oil tanker and sold to the highest bidder. For too long, Oil Sands companies have lazily sold their production almost exclusively to the USA. After all, they are close by, a large market - it was an easy and profitable way to operate - but it came with significant risks. Risks now that are being realized.
The Oil Sands were dependent on one market for their sales. The thinking went, the USA is a very large market so there will not be any need to broaden the horizon of sales for the Oil Sands assets. Several things happened that colluded to create a perfect storm of Canadian Oil Sands discounts:
- A President being elected that depends on a lot of his support from a demographic who believes the Canadian Oil Sands are to be resisted at all costs. (No mention is made of Venezuelan or Californian Heavy Oil when bemoaning the CO2 released). This has resulted in the effective scrapping of the Keystone Pipeline
- The Shale Gas and Oil Revolution in the USA. This reduced the USA's dependence on foreign oil imports and helped change the market dynamics to where the Canadian Oil Sands were effectively price takers
- Canadian infrastructure delays
Regardless of your personal beliefs on this subject - there are too many hydrocarbons sitting there in Northern Alberta, BC & Saskatchewan to not be developed. They will and are being developed and with the Keystone delay and production increases, there has been a shortage of infrastructure capacity to get the product to market. The supply is too large compared to the ability to transport it to where the demand is highest. This means lower prices.
This situation came to a head in 2013 and at one point the price differential between Western Canada Select (Oil Sands standard) and West Texas Intermediate was over $40/bbl (!). Needless to say, this caught the attention of industry and government. Both company and government revenues suffered appreciably. This mobilized them both to look for other opportunities to move the product. What should have happened from the start is now happening with renewed urgency.
· Enbridge (EN) is reversing existing pipelines to flow from West to East - Line 9 reversal will take Oil Sands crude to a refinery in Montreal for use domestically in Eastern Canada and North Eastern US and/or shipment overseas for an ability to get Brent Crude prices for WCS Oil. A compelling and profitable scenario. This plan was just recently approved.
· Enbridge is quietly expanding current cross border pipelines (no presidential permit required) while everyone is focused on TransCanada's keystone pipeline.
· TransCanada's (NYSE:TRP) Energy East pipeline plan to transport 1.1 million bbl/day (35% larger than Keystone) from Hardisty Alberta to Saint John NB. Saint John NB is home to Canada's most modern & largest refinery as well as access to a true deep-water port for crude or finished product export. Again, with the ability for Oil Sands oil to fetch near Brent Crude prices.
· Northern Gateway Pipeline. The NEB has approved the pipeline and we are now awaiting a final decision (that should be coming shortly after the latest Keystone setback)) from the Canadian Prime Minister.
· Vastly increased Oil by Rail Capacity. This allows a flexibility that the Oil Sands never had before. Even after the appropriate Pipeline infrastructure is built, this Oil by Rail flexibility will be very, very valuable to the Oil sands players. The Oil by rail capacity is currently estimated to be 500k barrels per day.
All of these projects are more than likely to be accomplished because they are unique in circumstance. A large part of the environmental movement is doing its best to shut down the Oil Sands access to market and have been surprisingly effective. However, Enbridge's Line 9 reversal, is an existing pipeline, just needing to reverse. TRP's Energy East is mostly already built as it is currently operating as a gas mainline from Alberta to Montreal. KMI's (KMI) Transmountain pipeline is another existing pipeline being expanded. The environmental movement will find these much harder targets to stall. Much of the environmental movement's initial success in stalling projects was due to catching the Canadian Oil Sands Industry, off guard and unprepared.
All this has conspired for Canadian Oil Sands companies, as an industry, suffer lower revenues, margins, net income all combined with lower PE multiples. Conversely, when these issues are resolved, we will see strengthened financials combined with increasing earnings multiples. This is going to be a slow motion transformation from the Oil Sands Industry being a price taker at the mercy of one large market to a price maker on the global stage.
And we can all get in on it now before Mr. Market wakes up to the immense potential.
There are many great companies that are stable, cash machines in their own right. For the enterprising investor looking to take advantage of this discounted industry in a fully valued market I would suggest having a look at the following primary Oil Sands Producers:
· Canadian Natural Resources (NYSE:CNQ)
· Suncor (NYSE:SU)
· Husky Energy (OTCPK:HUSKF)
· Imperial Oil (NYSEMKT:IMO)
· Canadian Oil Sands (OTCQX:COSWF)
Also, have a look at the Pipeline companies such as:
· Enbridge (NYSE:ENB)
· TransCanada Pipelines (NYSE:TCP)
· Interpipeline (IPL.TO)
For the ETF minded, there are:
· Oil Sands Index fund (CLO)
· And others
The Canadian Oil Sands Industry is immense, is on sale and is stable. I advise investors to do some due diligence and invest appropriately for their risk levels.
Disclosure: I am long CNQ, SU, COSWF, TRP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.