Favor Canadian Oil Sands on Price Blowout, End Buy on Canadian Natural Resources

Includes: CNQ, COSWF
by: Kurt Wulff

A widening of the price difference between Syncrude and West Texas Intermediate (WTI) to $12 a barrel, which, when added to $105 for the benchmark WTI, magnifies the price of Syncrude to $117, a boon for buy-recommended Canadian Oil Sands (OTCQX:COSWF) . Cash flow for the Syncrude producer is multiplied further by better than expected volume for the past three months.

While upgraded oil, such as Syncrude, is becoming relatively more valuable, the price difference between raw oil sands (bitumen) and WTI is widening in the other direction to more than $30 a barrel less than WTI. Canadian Natural Resources (NYSE:CNQ) is doubly impacted as its resources are primarily heavy oil that is priced closer to bitumen and its new plant to upgrade bitumen to synthetic crude oil will be idle for most of the year due to an unfortunate fire in January.

That less favorable turn of events, along with our desire to rebalance our number of buy recommendations of large cap Canadian producers to five from six, prompts an end to our buy on CNQ. Though volumes are down for now, CNQ will still generate strong cash flow . COSWF has the lower McDep Ratio at 0.67 and both stocks are in a price uptrend. Crude oil price is also in an uptrend with the current quote of $104 a barrel for the next six years above the rising 40-week average of $89.

Originally published on March 8, 2011

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