Alberta Oil Sands: Investing In The Juniors

by: Retirefund

“The oil sands are a national treasure for Canada and the U.S. The resource is secure and comes from a friendly neighbour. In addition, much of the U.S. dollars spent on Canadian oil come back to America in trade.”

- U.S. Senator Lindsey Graham

While much of the U.S. heartland is suffering from severe unemployment and a loss of blue collar jobs, there is one place on the North American continent that is, in point of fact, the direct opposite.

The city of Fort MacMurray in Northern Alberta is, without a doubt, an incredible boom town at this writing. Young people from all over Canada, and now the U.S. are finding jobs in the six figure range, with barely a high school education. The Government of Alberta foresees a worker shortage of nearly 100,000 by 2015 according to the Calgary Herald. The only comparison I can think of is Dawson City during the Klondike Gold Rush, and that was on a much much smaller scale. Several of my son's friends moved there out of high school and are making over $125,000 salaries, digging the bitumen out of the sands. In fact, they have done so well, they will not go to college, choosing instead to make their fortunes in the sands.

As is evidenced from this chart, the oil sands continue to grow, and with the world dependent on oil for the foreseeable future, it is a fait accompli.

A chart of the planned increases in oil produc...
(Click to enlarge)

Alberta is the only province in Canada that has no sales tax. They also boast the lowest income tax in the country. Because of these things, cities like Fort MacMurray, Edmonton and Calgary, have some of the youngest populations on average in the country, according to the Alberta Government website. The reason of course, is the massive oil reserves that are the oil sands. Big oil, medium oil and small oil companies have staked their claims over 30 years. Money has been pouring into Northern Alberta and continues to pour in as Countries as diverse as China and India invest in the sands.

Over the past few years, I have bought into Both Suncor (NYSE:SU) the big dog currently digging in the sand, and Cenovus Energy (NYSE:CVE). They are both ramping up operations over the next few years. Cenovus in particular, sees a 100% increase in production in five years and a 500% increase in ten. There are other big dogs digging in the sand such as Exxon (NYSE:XOM), and ConocoPhilips (NYSE:COP). Actually, just list off some names of your own and you can bet they have at least a small footprint in the sand.

These are solid choices if you want to invest in this massive resource, for a number of reasons. Cenovus is my number one pick because of its technological advantages in refining the heavy oil. I plan on accumulating more over the medium term, however it is the oil juniors who now pique my interest for different reasons.

Investing in junior resource companies, whether it is oil, gold, silver, gas, coal or whatever, is not for the faint of heart. Sometimes there are stomach turning swings in share price. Other times it seems like an eternity before there is any action at all, not to mention the lack of a liquid buyer base when all hell breaks loose in the markets. However, once you have decided to take the plunge, there are some rules I like to follow.

1. Invest in management: There should be a track record of proven experience on the management team, and at least one leader who has shown real drive in getting things done. An "up and comer," so to speak.

2. Land: Where are the claims, what do they encompass. How large is the resource base. What is the quality of the bitumen.

3. Location: Are there prosperous, successful companies in adjacent claims. Location! Location! Location!

4. What is the plan: Why will it work! What is the timeline, or is there a potential buyer (takeover target).

5. Limit your investment: How much to invest. I believe no more than 5% of your portfolio should be risked in junior plays.

There are many oil and gas juniors now in Alberta, however I have only focused on one which I recently bought into.

Alberta Oilsands Inc. (AOSDF.PK) is a Calgary, Canada-based oil sands developer focusing on bitumen resources in the Athabasca oil sands region of northeast Alberta. AOS focuses exclusively on underground or in situ recovery, ensuring a small physical footprint and reduced surface disturbance. As of 2007, AOS leases the bitumen rights to 106 net sections of lands. (over 66,000 hectares) on four properties, Clearwater, Algar Lake, Grand Rapids and MacKay River.

Relative to the gigantic scale of the Alberta oil sands, AOS is a smaller company. However, small in the oil sands can still be a very large opportunity. Production potential at Clearwater, one of their four properties, is estimated at 15,000-25,000 barrels per day – equal to an intermediate-sized conventional oil and natural gas producer. As is stated on its website, AOS’s smaller corporate size results in low overhead costs, an entrepreneurial culture and responsiveness to input from stakeholders. AOS has an experienced management team and is supported by industry-leading technical consultants.

AOS is a penny stock, with a $21M market cap and 139m shares outstanding. On Monday, it traded between .155 cents and .165 cents, a 52 week low for the stock which currently has a book value of .47 cents. AOS traded over $2 per share in 2007 when it initially purchased the leases. Current revenue is $2.1 Million. AOS feels the Clearwater field alone holds about $2.5 Billion worth of bitumen.

While the U.S. continues to waiver over the green lobby's protests of the oil sands, over the past five years Chinese oil companies have invested over $18 billion in the oil sands, mostly buying minority stakes in existing projects. This week alone, the Chinese National offshore Oil Co (NYSE:CEO) invested another $2.1 Billion when it bought Calgary based Opti Canada Ltd. CNOOC already owns over 14% of oil junior MEG Energy.

The Canadian government has welcomed China's investments in the oil sands as it seeks a broader trading relationship with China. At this writing more Chinese investments are in the offing while other countries such as India and Russia are also making plays for oil sands acreage.

Uncle Sam may be sleeping, but you do not have to. If you believe there will be more M and A action in the sands, and you want to dip your toe in to the volatile junior oil sector, AOS may be good place to start.

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Disclosure: I am long SU, CVE, AOSDF.PK.

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