Attractive Opportunity in COS:
Deep value, growth at reasonable price, contrarian, tech
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Summary
- New capital projects are coming to an end, which will lead to higher margins.
- Tight oil is more expensive than oil from the Canadian Oil Sands.
- High dividend payer - over 7%.
Recently, there has been a significant decrease in the price of oil that is being felt across many oil stocks. One stock in particular, Canadian Oil Sands (OTCQX:COSWF) is significantly depressed with an attractive dividend at 7%. Typically, when I see falling share prices and a high dividend, I get nervous as these are typically warning signs of a troubled stock. Yet, this is not the case with Canadian Oil Sands, as global economic conditions are providing for this buying opportunity.
Canadian Oil Sands owns a 37% share of the Syncrude Oil project in Alberta, Canada. The lease lot that the project holds, is in a premium location within the Alberta oil sands.
Price of oil
Source
WTI crude oil, where the light sweet crude from the oil sands is strongly correlated to, has fallen drastically in the past three months. The price drop is widely accepted as an oversupply and slow economic growth issue. Many economists have forecasted that as the price per barrel approached $80 USD, OPEC will reduce production to stabilize the price.
Gross Margins will be affected as oil prices continue to fall. While Canadian Oil Sands is not the cheapest oil extractor, the break-even point is lower than many other suppliers. The Canadian Oil Sands project has a break-even point of $63.50 USD. Some cost effective suppliers are in the $45 USD range. Currently, the US Bakken range has a break-even point of $69 USD, and the Permian area is one of the more expensive areas to extract the oil at $81 USD.
Capital expenditure on 4 projects
An area that has been hurting Canadian Oil Sands' share price, has been the large capital costs associated with some recent projects. The capital expenditure cycle is coming to a close, and it is anticipated that capital spending will be greatly reduced.
The two large projects that are nearing completion are:
Centrifuge Tailings Management project at 85% completion and will be operational in the first half of 2015.
Mildred Lake Mine Train project at 95% completion and is scheduled for completion by the fourth quarter of this year.
This will allow for capital to be allocated to shareholders, by maintaining the high dividend in a lowering oil price environment. When oil prices do eventually return to triple digits, Canadian Oil Sands will be in an attractive position.
Long-term stock price - dividend - earnings
(click to enlarge)
finance.yahoo.com
The share price at $15.29 USD is at a 10-year low. Currently, Canadian Oil Sands is returning dividends to shareholders at a payout ratio of 80%, with a projected EPS of $1.64 CDN and a $1.40 annual dividend (paid quarterly). This payout ratio is high, but when taken into account the high capital costs recently incurred and that these costs are ending, any dividend cuts will be small if not anything at all. Obviously, this is predicting current oil prices will return to normal levels within a short period of time. Prolonged suppressed oil prices will cut into gross margins for all oil producers. It is reasonable that in this economic environment new well drilling will slow down, stabilizing the fall in oil prices.
Pressure from fracking - tight oil
The oversupply has been attributed to fracking for tight oil in the United States. New wells have to be built at a higher rate due to the nature of the fracking process. This can lead to higher capital costs.
Tight Oil Comparative
From the comparative graph, the Permian and US Bakken range would be impacted before Canadian Oil Sands. This would lead to a reduction in supply, before oil sand operations would cease. It is interesting to note that as the Canadian Dollar improves against the United States Dollar, oil from Canada will be more cost effective.
Conclusion
Investing in Canadian Oil Sands is only valid, if you are a believer that oil prices will rebound in the near future. If you believe there is more room to fall, then any investment in the oil industry would not be prudent. I am of the opinion, that oil prices will stabilize at the current levels and oil would not fall below $75 USD per barrel. This puts the industry as a whole in an attractive light. And if I was to pick a depressed stock with significant upside, Canadian Oil Sands would be my pick.