Alberta Royalty Panel Drops Bomb On Oil Sands Stocks

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Includes: COSWF, ECA, IMO, OBE, PCZ, SU
by: Kurt Wulff

Our buy-recommended Canadian stocks may see selling pressure until investors have more confidence that the most negative recommendations of a provincial royalty panel will not be implemented.

The stocks from highest to lowest McDep Ratio are ImperialOil (NYSEMKT:IMO), Suncor (NYSE:SU), Petro-Canada (PCZ), Encana (NYSE:ECA), Penn West EnergyTrust (PWE) and Canadian Oil Sands Trust (OTCQX:COSWF). Though we are surprised that the panel recommends an increase in the oil sands royalty rate to 33% from 25%, stock prices may soon anticipate the likely potential damage.

Moreover, pioneer oil sands producers, Suncor and Syncrude (37% COSWF), may exercise their legal right to reduce government payments by applying the royalty percentage to lower value raw material instead of finished synthetic crude oil.

In their report released late on September 18, the panelists would increase “government take” from 47% to 64% that we calculate as a 36% increase in cash potentially to be taken by the Canadian province from investors (see http://www.albertaroyaltyreview.ca/index.html). It looks to us like the panel met in Caracas and we greatly hope that the final outcome is for the Alberta government to honor the agreements in place when multibillion dollar investment decisions were undertaken.

Originally published on September 19, 2007.