Nesbitt On Royalty Rates
Sector Impact
Oil Sands
We believe the revised royalty rates should be relatively neutral for oil sands companies. The government has left the previous rates of 1% and 25% intact at crude prices of $55/bbl, with escalation tied to rising oil prices. At $60 crude oil prices, we estimate that the royalty rates increase to 1.6% and 26.2%, respectively. Chart 1 illustrates the impact on net asset value for several oil sands companies based on the proposed royalty rates at different crude oil price levels. At current crude prices of approximately $90/bbl, the new royalty structure reduces net asset value by an average of 9% relative to what the company’s net asset value would have been under the generic oil sands scheme. Suncor is the most impacted by the changes to the royalty system, assuming that the company transitions to the new scheme in January 2009. We believe it is important to recognize that our net asset value estimates would be roughly 65% higher than our currently published estimates at the same price level, as illustrated in Chart 2. Accordingly, the higher royalty rates for oil sands are not especially onerous in the context of a stronger crude oil price environment. For example, while Suncor’s royalty rate would increase to 40% at $120 oil prices, its net asset value would also rise to more than $200/share.