Shiv Kapoor

Canadian Oil Sands Looks Attractive Despite Near Term Risk

I believe energy sector fundamentals are very sound; however valuations have long over-shot fundamentals. And where the value gets good could lie well below where we see them today. What I do not like about Canadian Oil Sands (not the Trust - I am speaking of the source of oil) is the marginal cost of production (near $80/bbl). The big risk here is that if ultra deepwater discoveries in Brazil, Angola, Gulf of Guinea or US GOM start flowing, you will have incremental supply with a marginal cost of production of $50-$55. This is where I see the oil prices trending down to in the event of a protracted economic contraction - my expectation is $75 with dips to $50-$55 on utter pessimism. For the Canadian Oil Sands Trust I have no idea what their marginal cost of production is - this will have a fundamental impact on valuation of their extractable resources.