By Martin Hutchinson
Contributing Editor
Money Morning
With oil finally trading back above the $50-a-barrel level, it's time to recognize that crude prices are probably not going to remain low for very long, and may end up fluctuating in the $50-$80 range - regardless of what happens to the prices of other commodities.
After all, the economies in both China and India are apparently continuing to grow at a fairly rapid pace, and those countries' demand for transportation and other forms of energy are thus likely to keep pace. For some minerals, the period of high prices from 2005 to 2008 has produced a surplus. But no such effect has been seen in the oil market, as large new discoveries are hard to find.
If we've learned anything in the last few years, it's that political risk is very important in oil investments. It's not just a question of outright nationalization - as is true in Venezuela. Other greedy countries, like Nigeria, boosted the royalties payable when oil prices were high, and have shown little willingness to reduce them again now that they have declined.
Hence, it's once again time to look at investments in the one important energy source whose friendliness to the United States and decent quality of governance can be assured.
I'm speaking, of course, about Canada.
Canadian oil-and-gas investments are attractive for three reasons.
- Canada's political stability makes it a buffer against turmoil from less-stable oil sources.
- The country's conventional oil-and-gas sources add substantial capacity at reasonable prices to U.S. domestic oil production; these sources are profitable at almost any plausible oil price.
- And Canada's tar sands in the Athabasca region represent a potential source of oil, with approximately 1.6 trillion barrels of theoretically recoverable reserves. That's potentially larger than the Middle East, but with two major problems: The cost of production is high and the environmental impact could be substantial.
That last point - and the two major problems it identifies - is key. At low oil prices, both factors make tar sands problematic; it is politically more difficult to overcome environmentalist objections if secure oil sources do not appear a priority. However, at high prices, environmentalist problems go away, although they may add to extraction costs. However, if prices escalate rapidly, extraction costs also tend to escalate, so oil-shale-producers reaped less of a bonanza than they might have in 2007-2008.
Now that oil prices have stabilized, the cost increase has slowed, so that (for example) Suncor Energy Inc.'s (NYSE: SU) tar-sands-production costs in this year's first quarter rose only 6% from the previous year, hitting $28 per barrel. Since oil prices are currently around $58 a barrel, that leaves plenty of profit margin.
The Canadian oil business is still rather more entrepreneurial than the international majors - Calgary is that kind of place. I remember an instance when I was working as a banker back in the 1980s. I'd spent the weekend in New York with my girlfriend, and then turned up for a scheduled Monday lunch with some oilmen at the Ranchmen's Club. Not thinking, I'd ordered my normal urban cocktail, an Apricot Sour. This was quite rightly treated with great derision, and I was firmly presented with a bullshot (vodka and beef bouillon) - in a pint beer mug! Got the deal, I'm proud to say, but was pretty worthless for the rest of the day.
The message: Investing in Calgary oil is a little like dining at the Ranchmen's Club; you have to have certain qualities of fortitude and stamina!
Canadian oil companies you might look at include the following (when looking at earnings, the first quarter of 2009 is a good guide; 2008 is all over the place because of the bizarre behavior of oil prices):
Canadian Natural Resources Ltd. (NYSE: CNQ): Primarily a conventional oil producer, this company's operations are centered on Western Canada, the North Sea and offshore West Africa (Gabon), though it is also building an oil sands plant north of Fort McMurray, Alberta. It is trading at about 14 times earnings when you strip out misguided risk management, and about 80% above book value. It's over-leveraged, too. Conclusion: A decent company, but pricey.
EnCana Corp. (NYSE: ECA): North America's largest natural gas producer and conventional oil producer, with operations in Western Canada, offshore Nova Scotia and the Western United States. It is a leader in oil recovery through steam-assisted natural drainage. Based on first-quarter earnings, its Price/Earnings (P/E) ratio is about 9, and its Price/Book (P/B) ratio is about 1.7. It has only moderate leverage. Conclusion: This one looks like a decent value; it even pays a semi-respectable dividend, yielding 2.8%.
Imperial Oil Ltd. (NYSE: IMO): Majority-owned by ExxonMobil Corp. (NYSE: XOM). Even though it's now headquartered in Calgary, Imperial is the least Calgary-ish of Canada's oil majors. It owns 25% of Syncrude Canada Ltd., the oldest tar sands project, and also explores for and produces conventional oil in Western Canada and in the offshore Atlantic provinces. Imperial also refines and markets petroleum, owning a chain of service stations and convenience stores, and produces petrochemicals. It experienced a sharp drop in first-quarter earnings, its P/E based on the lower first-quarter results is about 40, with the stock trading at four times book value. Conclusion: Overpriced.
Nexen Inc. (NYSE: NXY): The former Canadian arm of Occidental Petroleum Corp. (NYSE: OXY), it owns 7% of Syncrude and another (Long Lake) start-up tar sands project, and has oil producing operations in Yemen, the North Sea, the Gulf of Mexico, Colombia and offshore West Africa. Its P/E is about 20 based on first-quarter results and it is very over-leveraged. Conclusion: Given the non-Canada risk, not very attractive.
Suncor Energy Inc. (NYSE: SU): A major tar sands play, Suncor has now agreed to merge with Petro Canada (NYSE: PCZ), a deal that's expected to close in the third quarter. Suncor also produces natural gas in Western Canada and operates refineries. Petro Canada has tar sands, natural gas, pipeline and retail operations. It is priced at about 30 times annualized first-quarter operating earnings, but oil prices are up about $10 since then (which should boost its earnings), and its tar sands production is ramping up. Conclusion: At 2.3 times book value, with a respectable balance sheet, it's a decent bet on oil's growth sector.
Talisman Energy Inc. (NYSE: TLM): The former BP Canada (NYSE ADR: BP), it was spun off in 1992, grew through acquisitions, and now has a diversified portfolio of holdings. It's active in Western Canada, the Western United States, the United Kingdom (including a wind-farm operation), Norway, Colombia, Peru, Algeria, Tunisia, Indonesia, Malaysia, Vietnam, Australia and Qatar. It has sold $2.5 billion worth of operations to raise cash. Talisman has a P/E ratio of about 8, based on its first quarter, or 11, based on continuing operations in that quarter. It has a P/B ratio of about 1.4, and only moderate leverage. Conclusion: An iffy company in terms of quality, but cheap, and is thus worth a look.
[Money Morning Contributing Editor Martin Hutchinson is also the editor of the brand new "Permanent Wealth Investor" service. Look for more information on that service in the days to come.]
News and Related Story Links:
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Wikipedia:
Athabasca Tar Sands -
Drink.Recipe.com:
Bullshot Recipe -
The Ranchmen's Club:
Official Web Site
In your article "6 ways to play Canada's Oil Sector" I was dissappointed that you did not mention "Canadian Superior Energy (SNG-AMEX)". I was told that there is just as much oil (if not more) off Nova Scotia than in the Gulf of Mexico. If this is true and SNG controls a great deal of that area, then it seems to be an ideal "Buyout" option if nothing else. Please forward your comments to me. Jim Finlen at http://www.jfinlen@dc.rr.com .
[…] projects being cancelled left, right and center. The trend is particularly apparent in the Canadian oil sands that were everybody's fancy only 24 months ago. Now we're seeing Royal Dutch Shell PLC […]
Canada changed its method of taxing royalty trusts in 2011 in order to get more tax revenue from them. They dropped this bombshell on the market in order to obtain 400 million dollars in lost tax revenue and it caused at least 1-2 billion (OR MORE) in losses in their stock market. Athabasca has been considering various tax plans to get more out of energy companies that explore in their region. I understand that this is different from having assets seized like they are doing in Venezuela or Russia but it still isn't easy for shareholders when a change in government can affect their holdings so seriously. Lots of shareholders were hurt by the political actions of the Canadian government and what is the value of collecting 400 million in taxes when you destroy BILLIONS of dollars when your stock market collapses due to political and government policies. We are getting a dose of that here in the good old USA.
Don't forget carbon liability here. Bitumen, the stuff that is mined in Canada and eventually made into a low-grade petroleum substitute has up to 3X the carbon emissions of more traditional petroleums. With the California LCFS and carbon legislation in DC underway…
And do not think that environmental concerns about the tar sands in Athabasca go away with higher oil prices. A lunar landscape that results from the largest industrial project on Earth and 50 plus square miles of toxic lakes cannot be swept under the rug.
How could you omit Canadian Oil Sands Trust?
What about PWE? That is a Canadian oil/natural gas company.
What are your views on that stock?
I have to mention Oilsands Quest (AMEX:BQI) This penny stock company has exclusive rights to leases in Saskatchewan bordering the Alberta Tar Sands They also utilize in-situ technology website http://www.oilsandsquest.com headquartered in Calgary, AB
I would also like to see an article regarding the proactive carbon capture storage plans the Canadian and Alberta governments are investing in which will have a huge impact on carbon emissions
[…] than its arch rival (the United States) for the foreseeable future. I wrote a few weeks ago about investment opportunities in the Canadian energy sector; those opportunities are even more compelling with the continued rise in the oil price to current […]
[…] Energy Inc. (NYSE: SU), which is the premier producer of oil from Canada's Athabasca Tar Sands, which contain more oil than the Middle East, but are only economically attractive when the oil […]
What is the website to locate NY/MEX oil prices?