Investing in the Oil Sands: Update

Includes: CNQ, COSWF, CVE, IMO, SU
by: Frank J. Constantino

On February 13, I wrote an article entitled "Investing in the Oil Sands: 4 Stocks." At that time, Egypt was in the midst of massive protests that resulted in a change in government. Light sweet crude was trading at less than $85 per barrel. Since then, we have witnessed massive protests in Bahrain, Iran, Oman, and even Iraq. Libya has fallen into chaos, with the government essentially declaring war on its own people. Investors are worried that the calm in the oil giant, Saudi Arabia, will be broken. Crude oil closed today at just under $102 per barrel.

The investment merits for the oil sands stocks are clear. The oil comes from the friendly country of Canada. The oil reserves are massive, second only to Saudi Arabia (some reports even claim more reserves than Saudi Arabia). The price of crude has made it very profitable for companies to extract crude from the oil sands, a process that costs about $30-40 per barrel. Demand for crude is at all-time highs as the United States and China consume more and more. Yet it isn't clear whether the four stocks I analyzed in my last article have come too far too fast. I chose these four stocks in particular because they offer investors exposure to the Canadian oil sands, but trade on U.S. exchanges. Below is a performance update since February 13.

Canadian Natural Resources (NYSE:CNQ)

Canadian Natural Resources has the lowest exposure to the oil sands in the group. The company gets about 15% of production from the oil sands.

CNQ 02/13/11 03/03/11 Change
Price $43.83 $49.40 12.70%
Forward P/E 18.32 19.74
Price/Earnings Growth 2.95 3.44
Price/Owner Earnings 29.81 33.6
Dividend Yield 0.68% 0.58%

Cenovus (NYSE:CVE)

Cenovus gets about 25% of its oil production from the oil sands region. The rest comes from other oil sources. The company is also active in natural gas, and natural gas liquids in Canada.

CVE 02/13/11 03/03/11 Change
Price $35.24 $39.32 11.50%
Forward P/E 26.27 24.44
Price/Earnings Growth N/A 2.05
Price/Owner Earnings 383.04 427.39
Dividend Yield 2.25% 2.07

Imperial Oil (NYSEMKT:IMO)

Imperial Oil generates about 75% of its oil production from the oil sands. The company also owns and operates natural gas liquids and crude oil pipelines in Canada.

IMO 02/13/11 03/03/11 Change
Price $45.67 $52.85 15.70%
Forward P/E 16.49 19.03
Price/Earnings Growth 2.09 2.43
Price/Owner Earnings N/A N/A
Dividend Yield 0.98% 0.85%

Suncor Energy (NYSE:SU)

Suncor garners more than 50% of its oil production from the oil sands. The company also has operations in exploration, development, and production of natural gas and natural gas liquids.

SU 02/13/11 03/03/11 Change
Price $40.82 $46.74 14.50%
Forward P/E 26.06 18.68
Price/Earnings Growth 1.16 1
Price/Owner Earnings N/A N/A
Dividend Yield 0.99% 0.87%

As you can see, all four of these stocks have had big moves up in the past three weeks. In some cases the P/E ratios have fallen, as earnings estimates have been raised with the price of oil. I still believe that oil will continue to stay high, allowing these companies to remain profitable. Most investors should have some exposure to crude right now.

However, investors should be careful when entering these stocks. The price has come a long way, and any drop in oil prices will send shares falling. A lot of the gains in these stocks is speculation right now. For the long-term, the oil sands are a great place to gain exposure to crude oil.

In addition to the names above, I like Canadian Oil Sands (OTCQX:COSWF), which is traded on the Toronto Stock Exchange. Shares can be purchased through any broker in the U.S. using the ticker COSWF. Canadian Oil Sands is a 100% pure play on the oil sands. The stock has a P/E ratio of 17 and has a dividend yield of 2.5%.

An investment in these companies after the recent run-up is somewhat speculative. However, if chaos were to spread to Saudi Arabia, speculation may turn to pure profit.

Disclosure: I am long COSWF.PK.