Investing in the Oil Sands: 4 Stocks

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

It seems everyone, including investors, are coming to grips with the fact that higher crude oil prices are here to stay. The fact is, the U.S., China, and other world economies have a insatiable demand for oil. While we are dependent on the Middle East for most of our oil, there are alternatives. The Canadian oil sands region is in the Alberta region of Canada. This massive area of oil reserves is second in size only to Saudi Arabia.
Oil from this region must be extracted from the sand at a cost of about $30-$40 per barrel of oil. The process has become viable in recent years due to the increasing cost of crude. With tensions flaring across the Middle East, we are reminded of the vulnerabilities of economies that have become so dependent on oil. It is great to know that we have a friendly neighbor to the north with vast amounts oil. The Canadian government has been more than willing help fill the oil demands of both the U.S. and China.
Earlier I wrote an article about an ETF that gives you exposure to the oil sands as a way to profit from rising crude prices. Now I am going to focus on individual companies that garner a significant amount of their revenue from oil sands production. The four companies in this article all trade on U.S. exchanges. Each of these four companies give you exposure to the oil sands and rising price of crude oil. In fact, the price of crude doesn't really even have to rise for these companies to remain profitable. It only has to stay high. Most people, including myself, don't see a steep drop in oil prices any time in the near future. Each of these four companies are components of the ETF I wrote about earlier.

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. The remaining oil production comes from other parts of Canada, the North Sea, Ivory Coast, and Gabon. The company's midstream activities include a natural gas pipeline and an electricity co-generation system. CNQ is probably the safest play on the oil sands because of its diversification. If a future U.S. energy policy includes natural gas, the company will benefit. CNQ trades at a reasonable 18 times forward earnings. The dividend yield is lowest of the group at only .68%. Revenues have grown nicely at 7% annualized over five years. Out of eleven analysts covering the stock; four rate it a strong buy, five rate it a buy, and two rate it a hold.

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. Cenovus is the most expensive, by P/E, of the group. But it also has the highest dividend of the group, at 2.25%. The company has done a good job of growing revenue as oil prices stay high. Over three years, annualized revenue growth is over 10%. Out of eleven analysts covering the stock; five rate it a buy or strong buy and six rate it a hold.
Imperial Oil (NYSEMKT:IMO)
Imperial Oil generates about 75% of its oil production from the oils sands. The company also owns and operates natural gas liquids and crude oil pipelines in Canada. IMO is the cheapest, by P/E, of the oil sands stocks. It has a forward P/E of 16.5. The stock has a dividend yield of nearly 1%. Although IMO has grown its dividend over the past five years, it has struggled to grow its revenue and cash flow. It's annualized growth rate of revenue and cash flow over the past five years is -2.3% and -3.3%, respectively. A major benefit to IMO is that it has virtually no debt. Long-term debt stands at only $35 million. Five analysts cover the stock. Two rate the stock a hold and three rate it an underperform.

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. Suncor is the largest of the oil sands producers, with a market cap of $64 billion. It's not cheap, trading at a forward P/E of 26. The stock has a 1% dividend yield, which has grown at a 21% annualized pace over five years. With Suncor you are paying for growth. The company has grown revenues at an annualized rate of 24% over five years. It has grown cash flow at an annualized rate of nearly 17% over the same period of time. It has a price/earnings growth ratio of only 1.16. Eleven analysts cover the stock. Three analysts rate it a strong buy, four rate it a buy, and four rate it a hold.

Market Cap 47.8 B 26.5 B 38.7 B 63.9 B
Recent Price $43.83 $35.24 $45.67 $40.82
Forward PE 18.32 26.27 16.49 26.06
Dividend Yield 0.68% 2.25% 0.98% 0.99%
5 Year Div. Growth Rate 13.30% N/A 6.50% 21.10%
Price/Book 2.23 2.94 4.42 1.96
Price/Cash Flow 11.3 13.3 16.43 15.01
Price/Earnings Growth 2.95 33.56 2.09 1.16
Return on Equity 11.63% 8.76% 22.27% 8.31%
Debt/Equity 0.4 0.4 0 0.36
Revenue TTM 12.1 B 12.2 B 24.3 B 31 B
Operating Cash Flow FYE 5.53 B 3.29 B 1.51 B 2.45 B
Capex FYE 2.84 B 1.78 B 2.17 B 4.04 B
Capex/Cash Flow FYE 0.51 0.54 1.44 1.65
5 Year Rev. Growth Rate* 6.90% 10.60% -2.30% 24.00%
5 Year Cash Flow Growth Rate 6.70% N/A -3.30% 16.80%
Net Profit Margin 15.58% 6.39% 7.89% 4.50%
Current Assets 1.86 B 2.99 B 3.04 B 8.96 B
Return on Assets 3.85% 3.15% 7.92% 1.64%
Long-term Debt 8.49 B 3.57 B 35 M 11.53 B

Data provided by Charles Schwab & Co.
*CVE rated at 3 year annualized growth rate due to unavailable 5 year data

All of these companies provide investors with at least some exposure to the oil sands. It is doubtful that the price of crude oil will fall to a level that will make these companies unprofitable, although that is a risk. Of the four companies above, I like Canadian Natural Resources and Suncor Energy. Canadian Natural Resources is a more diversified company offering a little less exposure to the oil sands. I like Suncor Energy because it has shown the ability to grow revenue over a longer period of time. If you are not comfortable picking winners in the group the Guggenheim Canadian Energy Income ETF (NYSEARCA:ENY) offers exposure to these companies and more.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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