I remember late 2008 and earlier 2009 vividly. Oil prices had dropped near $30 and there were plenty of talking heads on television calling for it to drop further. The financial health of virtually any company with debt was being called into question and it felt like the world was headed for a depression.
Of course the world didn't end, the economy has started growing again and the share prices of most companies have rebounded. Especially the share prices of oil focused companies that now have $100 oil to drive cash flows instead of $30 oil.
Here are a few examples:
- Canadian Natural Resources (NYSE:CNQ) March 2009 Low - $13.75
- Canadian Natural Resources Today - $36.48
- Suncor (NYSE:SU) March 2009 Low - $17.83
- Suncor Today - $34.22
- Canadian Oil Sands (OTCQX:COSWF) March 2009 Low - $18.10
- Canadian Oil Sands Today - $22.23
I knew the share price of Canadian Oil Sands was suffering, but I was shocked at how close it currently is to the range it traded when oil was $30 and world was falling apart.
An Easy Company To Value
Canadian Oil Sands Ltd only owns one asset, a 36.74% interest in Sycrude, which is an oil sands producer. In 2010 Conoco Phillips (NYSE:COP) sold its 9.03% interest in Syncrude Chinese company Sinopec for $4.65 billion. Applying this valuation to Canadian Oil Sands Ltd's 36.74% interest in Syncrude results in a valuation of $38 per share after backing out $500 million of net debt. The current share price of Canadian Oil Sands is bouncing around $22 per share.
I think it is important to note that at the time Sinopec purchased the Conoco stake, oil prices were bouncing either side of $70. Today in North America we have oil at $100. The rest of the world which is subjected to Brent prices has an oil price closer to $120.
I don't want to jump to any drastic conclusions, but I will suggest that if Canadian Oil Sands interest in Syncrude was worth $38 when oil was at $70, then it likely hasn't decreased in value with oil at $120 globally. You might even conclude that it has increased which could get you a valuation that is twice the current Canadian Oil Sands stock price.
What is Syncrude?
Syncrude is the largest producer of light, sweet synthetic crude oil from Canada's oil sands, and has been in operation since 1978. It is a joint venture project owned by the following companies:
- Canadian Oil Sands - 36.74%
- Imperial Oil (NYSEMKT:IMO) - 25%
- Suncor - 12%
- Sinopec (NYSE:SHI) - 9.03%
- Nexen (NXY) - 7.23%
- Mocal - 5%
- Murphy Oil (NYSE:MUR) - 5%
Each owner holds an undivided interest in the project, pays their share of costs and takes their production in kind, which they then market themselves. In 2006, Syncrude signed a Management Services Agreement with its 25% owner, Imperial Oil, whose parent company is ExxonMobil (NYSE:XOM).
Syncrude is a mining project, not a thermal or SAGD recovery project. This means that the recovery rates which are around 90% are much more predictable and that the project is not nearly as exposed to natural gas prices (which is not much of a concern these days).
Extremely Long Lived Reserves In a Secure Location
Time will likely be the friend of Syncrude and Canadian Oil Sands. According to Canadian Oil Sands, independent reserve auditor the Syncrude reserves have a 44 year reserve life at current production rates. That 44 year lifespan relates only to the almost 5 billion barrels of proved and probable reserves of Syncrude. On top of that is another 5 billion barrels of contingent resource from which considerable oil will clearly be recovered.
As years go by oil demand is going to rise and reserves with this long of a life should become an increasingly valuable asset.
Much of what makes Canadian Oil Sands attractive is what it doesn't have. It doesn't have natural gas assets which these days don't make any money, Canadian Oil Sands is 100% oil focused. It doesn't have any foreign assets which are subject to political and security risk. And it doesn't have any offshore assets which are subject to spill risk which is not insignificant as BP showed us.
So What's The Problem?
Canadian Oil Sands is pretty obviously inexpensively valued in relation to a price paid for the very asset that it owns when oil prices were $70 rather than the almost $120 global price today. On top of that, the company pays a very secure $0.30 per quarter (over 5% yield) dividend. With oil prices at $100-plus levels, the company has indicated that this dividend level will likely be increased.
So why hasn't the share price bounced back from the 2009 lows and moved closer the price Sinopec paid for its Syncrude asset? The main problem has been recurring operating challenges that have kept Syncrude from hitting targeted production levels. Quarter after quarter of not meeting production estimates take its toll on a publicly traded company's stock price, as the Wall Street game is all about meeting estimates.
But my interest isn't about a company meeting short-term estimates. It is about the intrinsic value of the assets that a company owns. A few quarters of production for Canadian Oil Sands is a blip on the radar screen for a company that will producing oil for the next 50 years, into (in my opinion) what will be ever increasing oil prices.
My plan is to keep averaging into Canadian Oil Sands stock. I will happily sit and collect a 5% dividend, which I believe will grow over time. I expect that the stock price will slowly creep up towards a more reasonable valuation, or perhaps one day I'll wake up and find that Exxon Mobil (which already owns 25% of Syncrude through Imperial Oil) has decided to acquire all of Canadian Oil Sands at a price significantly higher than the current stock price.