In the 2010s, contrarian buy-recommended Canadian Oil Sands Trust (OTCQX:COSWF) offers similar premier investment growth, protection from inflation and resistance to deflation characteristics as it demonstrated in the 2000s. Our work points to unlevered total return potential of 41% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $38 a share. Thereafter, the total return would be an unlevered 7% a year before adjustment for inflation at an oil price of US$75 a barrel, also before adjustment for inflation.
NPV is concentrated entirely on a large asset with a 37% ownership of Syncrude, an efficient producer of high-quality synthetic crude oil whose price would likely adjust with inflation. A strong balance sheet with minimal debt carried the stock through the sharp deflation of 2008. Though the basic investment appeal is intact, it is buffeted by near-term cross currents on oil price, volume and dividends.
Oil Price May Be Trending Up
On oil price, we see signs that a new uptrend may have begun, indicated by the crossover of the next twelve months' quote above 40-week average. We use futures prices for estimating near-term cash flow. A persisting trend would lead us to raise our long-term price assumption for estimating NPV.
Oil Volume Growth May Be Slow Before New Expansion
On the volume outlook, we are optimistic that a new Chief Executive Officer of Syncrude Canada, Ltd., ExxonMobil’s (XOM) Mr. Scott Sullivan, appointed in August, can accelerate the slow trend toward full capacity of 350,000 barrels daily. Mr. Sullivan may be able to rescue ExxonMobil’s diminished reputation for timely project execution. Mr. Sullivan also has the confidence of new 7% owner of Syncrude, Asian oil refining giant, Sinopec, since he managed a joint venture of Sinopec and ExxonMobil in China. At the same time, engineering design is underway for new expansion to 425,000 bd of synthetic crude oil plus 115,000 bd of bitumen for a total of 540,000 bd by 2020.
Corporate Dividends Likely Lower than Trust Distributions
With the government induced conversion of the trust to a corporation in 2011, management has declared its intention to pay a dividend that may be lower than the current distribution. Canadian corporate taxation is more of a device to encourage reinvestment than to raise revenue directly. If that reinvestment is sufficiently profitable, the total return to stock investors may change little as the likely lower current dividend or distribution is offset by additional expected capital gain. Since the dividend is subject to management discretion, our estimate has to be more tentative until management is more definitive. Management will release its expectations for 2011 when it reports third quarter results in the evening on October 28.
Geographic Domicile, Size and Relative Value May Attract Acquisition Attention
Buyers have cash to acquire resource investments where their money is welcome as in Canada. A possible bid at present value or acquisition value of $20 billion for COSWF would be manageable for most of the big players in the global marketplace. In any case, COSWF compares favorably with large cap companies on regular valuation measures.
Originally published on October 5, 2010.