Building Wealth in the Canadian Oil SandsFebruary 25, 2011
Building Wealth in the Canadian Oil Sands
by David Dittman
Six months ago we dropped several names related development of the Canadian oil sands, that vast collection of potential reserves capable of solving the problem of excessive dependence on Middle East crude.
Here’s what we had to say on Aug. 11, 2010:
At one end of the Canadian oil sands story at the moment are MEG Energy and Athabasca Oil Sands (Toronto: ATH.TO, Other OTC: ATHOF.PK). At the other are heavyweights such as Canadian Oil Sands Trust (Toronto: COS-UN.TO, Other OTC: COSWF.PK), the biggest pure play, and Suncor Energy (Toronto: SU.TO, NYSE: SU).
Of the latecomers to the public market, MEG is a better proposition than, Athabasca Oil Sands, which listed on the TSX back in April. We like Suncor and Canadian Oil Sands, though Suncor is a bit beyond value range right now. The best investment remains longtime Canadian Edge Portfolio Holding Pembina Pipeline Income Fund (Toronto: PIF-UN.TO, Other OTC: PMBIF.PK).
MEG Energy (Toronto: MEG.TO, Other OTC: MEGEF.PK) had just made its initial public offering (IPO); it had fallen a little flat as of mid-August. We pointed out the following:
The MEG story includes many of the elements that make the broader case for Canada particularly compelling: a major piece of a key asset, the Canadian oil sands, and the 170.4 billion barrels of recoverable crude that distinguish Canada from the rest of the developed world; heavy participation by serious North American institutional players; and China.MEG reached a post-IPO closing low of CAD30.86 on Aug. 26. Since then it’s been “to the moon, Alice”: The stock is trading at CAD47.92 as of midday Friday, a 58 percent gain.
Athabasca Oil Sands has up an even more impressive 61 percent. For comparison sake, the S&P 500 is up 22.2 percent, while its Canadian counterpart, the S&P/Toronto Stock Exchange Composite Index, is up 30.7 percent. The S&P 500 Energy Index is up a cool 36.1 percent and the S&P/TSX Energy Index is up 29.4 percent.
We’d love to claim credit for making a call on MEG, but that wasn’t the point of the piece at all. In fact, the vehicle we recommend has underperformed all but one of the names we mentioned. Suncor Energy has outperformed, returning 41.7 percent and rising above USD45 on the New York Stock Exchange. Canadian Oil Sands Ltd (Toronto: COS.TO, Other OTC: COSWF.PK), the converted Canadian Oil Sands Trust, has notched a 26.1 percent gain from Aug. 11, 2010.
Up until the pure play’s fourth-quarter and full-year earnings report investors had been deserting it left and right. The stock decoupled from crude, which began its latest leg up from below USD68 (based on the front-month generic New York Mercantile Exchange light sweet futures contract) in late May 2010. Events now unfolding in the Middle East quickened the pace of oil’s rise and have clarified the point that the oil sands are a “key asset,” and investors have been drawn to the stock with the easy-to-identify, easy-to-buy name.
That’s too snarky a spin on it, though, as Canadian Oil Sands did report along with fourth-quarter and 2010 results, that production at Syncrude had come as close as it ever has to approximating capacity during the final weeks of the year. In addition to the events in Egypt, Libya and elsewhere (Saudi Arabia?) this long-term positive supports a higher valuation.
The biggest question about the stock back was costs, a point I made when I named Canadian Oil Sands as my top pick for 2011 for Steven Halpern’s annual feature at BloggingStocks.com:
A series of unplanned turnarounds at the Syncrude operation, of which Canadian Oil Sands owns 36.7 percent, have analysts questioning whether rising costs will ever allow Canadian Oil Sands to really benefit from elevated oil prices. And the very skeptical wonder if actual output will ever match Syncrude’s capacity potential. All in all, after years of hype and outperformance the bar is now set rather low for Canadian Oil Sands.
That selection was made within a very limited context--that being the next 12 months. My rather blunt forecast was that Canadian Oil Sands would eventually follow oil prices higher as long-term stresses on supply and fundamental changes in the global demand profile came in to relief with a strengthening economic recovery. Canadian Oil Sands stock has reverted to the mean, and then some, and the company, the sole asset of which is a 36.7 percent interest in the Syncrude joint venture, continues to enjoy an uneventful 2011 from an operations standpoint.
Pembina Pipeline Corp (Toronto: PPL.TO, Other OTC: PBNPF.PK), the corporate successor converted Pembina Pipeline Income Fund, was the focal point of the August income-plays-and-IPOs story:
Pembina Pipeline Income Fund, about as secure and sound a dividend-payer as there is, according to the CE Safety Rating System, holds an exclusive contract to transport production from the Syncrude consortium to terminals in Edmonton, Alberta. Pembina Pipeline’s cash flow is based on throughput; its fee-for-service revenue is not directly tied to the price of crude oil.
It’s up 27.8 percent in US dollar terms since, not reflecting, of course, oil’s death-defying rise and underwhelming in the light of even the broad North American indexes. But when you take a look at the bigger picture, which accounts for all the various shocks and corrections that have taken place during the past half-decade, the Pembina proposition is clear. Note that since the third week of February 2006 Pembina Pipeline (the white line) has outperformed the S&P/TSX Composite (the green line) and the S&P/TSX Energy Index (the red line).
Source: Bloomberg
It’s also bested Canadian Oil Sands (the green line) and Suncor Energy (the red line), the integrated giant with significant (and growing) output from the resource:
Source: Bloomberg
Over the long term Pembina Pipeline--and its 7 percent-plus yield--is the way to build wealth in the Canadian oil sands.