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I wrote the first part of my article about the overlooked heavy oil patch and the junior and intermediate players a few days ago. These junior and intermediate players offer higher odds than the majors below to hit significant returns during the next months. It depends on us to find which ones are truly undervalued, and I believe the first part of my article points them out. In this second part, I'll capture the major Canadian heavy oil players.

The major players

1) Athabasca Oil (OTCPK:ATHOF) has both a heavy oil and a light oil division. It is operationally focused on balancing growth between its Light Oil and Thermal Oil Assets in Alberta, Athabasca's asset portfolio consists of 1.6-million acres with in-situ thermal oil resources and over 2.0 million acres in geological trends with multi-stacked horizons rich in liquids-rich gas and light oil potential. The company is currently in negotiations to sell part of its heavy oil projects and assets to the Kuwait Petroleum as mentioned above. Athabasca's first Thermal Oil (also referred to as in-situ) production is expected in late 2014. The in-situ production ramp-up target is 100,000 bbls/day to 130,000 bbls/day by 2020. In terms of the light oil division, the company has land primarily in Kaybob area of Alberta and its first production started in late 2011. Athabasca currently has more than 7,000 boe/d (50% oil and NGLs) behind pipe, awaiting tie-in during Q3 and Q4 2012. Athabasca has PBV = 1.6 currently and it may incur losses for 2012 as its projects have not yielded any profits yet. It also has negative funds from operations (FFO) for 2012. Some investors will say that Athabasca has run too much based on the acquisition speculation and/or other unknown factors and I will not disagree with them.

2) Suncor Energy (SU) is the largest of the Canadian companies, with integrated operations of conventional wells, refineries and oil sands projects. Formed from a merger with Petro-Canada, it is the world's largest oil sands operator. It is the largest Canadian oil and gas company with a market capitalization of $50 billion currently and an 550,000 boepd production approximately (91% oil and liquids) in 2012. This may be too large a target for most buyers and the company also has no upstream operations in the United States. Suncor also has a substantial downstream refining segment. In the international area, Suncor has attractive properties in the North Sea (Norway) and offshore eastern Canada, but also has operations in Libya and Syria, two countries that have experienced significant social turbulence and political unrest lately. It initiated a share buyback program in Q3 2012. It also pays a dividend with a 1.4% annual yield. Based on its 2012 EPS, it trades with a 2012 PE = 12 and PBV =1.2 currently. It also trades 5x its funds from operations annualized (FFO) and a long-term debt/FFO ratio equal to 1.2.

3) Canadian Natural Resources (CNQ) is a focused oil sands firm. Its $9.7 billion Horizons oil sands project is a make-or-break one for the company and its future growth prospects. Canadian Natural Resources has its core operations (94% of its total production) in Western Canada, where it is heavily involved in various oil sands projects and has substantial natural gas operations as it is the second-largest natural gas producer in Canada. The company reported production of 679,000 boepd in Q2 2012 (70% oil and liquids). On the international front, the company has oil properties in the North Sea and offshore Africa (3% of its total production for each region) and plans to increase capital spending on these properties, with $515 M allocated in 2012. Although this is almost double the level of spending in 2011, the company expects oil production from these international properties to decline on 2012. It initiated a share buyback program in Q2 2012. It pays a dividend with a 1.4% annual yield. Based on its 2012 EPS, it trades with a 2012 PE = 12 and PBV = 1.4. It also trades 5x its funds from operations annualized and a long-term debt/FFO ratio equal to 1.9.

4) Cenovus Energy (CVE) is a spin-off from Encana (ECA) and it has both oil producing (Canada) and refining operations (Illinois and Texas). It reported production of 166,000 boepd (94% oil) in Q2 2012 both from oil sands projects (Foster Creek and Christina Lake) and from conventional wells. The company continues to advance its Telephone Lake oil sand project and it also received recently the regulatory approval for its Narrows Lake heavy oil project. It pays a dividend with a 2.5% annual yield. Based on its 2012 EPS, it trades with a 2012 PE = 16 and PBV = 2.5. It also trades 8x its funds from operations annualized and a long-term debt/FFO ratio equal to 1.1.

5) Imperial Oil (IMO) is Canada's second-largest petroleum company. It is engaged in the upstream business of exploration, extraction, and production of crude oil and natural gas for the past 130 years. In addition, the company is involved in the downstream business of refining and marketing as well as the chemical business. Imperial Oil Limited is a subsidiary of Exxon Mobil Corporation (XOM). Its heavy oil production comes from its substantial stakes in several oil sands projects in Canada. It is a dividend payer with a very low annual yield which is equal to 1%. It produces almost 250,000 boepd (80% oil and liquids). It initiated a share buyback program in June 2012 which is an indication that it is undervalued at $40. Based on its 2012 EPS, it trades with a 2012 PE = 11 and PBV = 3. It also trades 10x its funds from operations annualized and a long-term debt/FFO ratio equal to 1.3.

6) Husky Energy (OTCQB:HUSKF) is the third-largest integrated oil producer and refiner of Canada and it is a Canadian company which is controlled by an Asian, the billionaire Li Ka-Shing. Husky operates Upstream, Midstream and Downstream business segments in North America and conducts upstream activities in the Asia Pacific Region and Greenland. The Company's conventional oil and natural gas assets, heavy oil production and upgrading and transportation infrastructure in Western Canada provides a firm foundation to support three growth pillars: the Oil Sands, the Atlantic Region and the Asia Pacific Region. The company is a dominant heavy oil producer with a 300,000 boepd (65% oil and liquids) current production approximately and an almost 5% annual dividend. Husky is currently building two new oil sands projects in Sandall and Rush Lake to produce heavy oil there by 2014 and 2015 respectively. It has also initiated the construction of another heavy oil project in Sunrise which is a 50/50 JV with BP Plc (BP) for the production of 20,000 bbl/d of heavy oil by 2016. Based on its 2012 EPS, it trades with a 2012 PE = 13 and PBV = 1.4. It also trades 7x its funds from operations annualized and a long-term debt/FFO ratio equal to 1.1.

7) MEG Energy (OTCPK:MEGEF) is an oil sands company focused on sustainable in situ oil sands development and production in the Athabasca oil sands region of Alberta. MEG is actively developing enhanced oil recovery projects that utilize steam assisted gravity drainage ("SAGD") extraction methods. It owns a 100% working interest in over 900 sections of oil sands leases. It produced 30,429 bbl/d in Q2 2012 from its Christina Lake project. It is also developing its Surmont project and began the regulatory process in early 2012. Based on its 2012 EPS, it trades with a sky high 2012 PE which looks to be much higher than 50 and PBV = 1.8. It also trades 30x its funds from operations annualized and a very high long-term debt/FFO ratio of 7. So obviously MEG is highly leveraged although this has not been factored into the price yet. All that being said, is MEG a good short candidate with such high ratios in comparison with the other major Canadian peers mentioned above? It may be but I do not short stocks.

Source: Trying To Find The Lightest Valuations Of The Heavy Oil Patch (Part 2)