CALGARY (CP) — With a dizzying list of multi-billion-dollar projects and their associated spin-offs of jobs, royalties, investment opportunities and taxes, Canadians – and not just Albertans – are becoming quite familiar with the word “oilsands.”
But among the opportunities arising from the oily mud of northern Alberta is a growing roster of companies that enable investors to bet on this rapidly developing heavy oil sector.
The first question to address is the size and viability of the sector.
In a recent report on the oilsands, Toronto-based bond raters Dominion Bond Rating Service said that with technological advances and relatively low risk profile, the oilsands are poised to be one of the world’s premier sources for oil over the next 50 years.
”In the future, Canada will rank in the top three of the world’s oil producing countries,” DBRS predicted.
But oilsands projects are not without their substantial risks either. All mega-projects currently operating in northern Alberta have seen cost overruns stretching into the billions of dollars due in part to the overheated local economy and lack of skilled labourers.
And because of the large investment needed to play, volatile oil prices, currency fluctuations and rising natural gas costs all cause headaches to operators.
Still, with the run-up in global oil prices over the past several years due to growing demand and security of supply, most large energy companies currently operating in Canada are getting heavily involved in the oilsands.
There’s also a growing interest from international energy heavyweights. French-headquartered Total SA made a splash earlier this summer with a C$1.58 friendly takeover of Calgary-based Deer Creek Ltd. in order to acquire its large leases in northern Alberta and plans to build a major oilsands mine and upgrader in the province.
ExxonMobil also has plans to build a vast open-pit mine in conjunction with its sister company, Calgary-based Imperial Oil [TSX:IMO; AMEX:IMO]. Royal Dutch Shell also has exposure thanks to Shell Canada’s [TSX:SHC] majority interest in the Athabasca oilsands project.
But Tom Ebbern, an energy analyst with Tristone Capital in Calgary says investing in the super-majors is not the way if you want oilsands exposure since their holdings are relatively small compared to their global portfolios.
Ebbern says the safest oilsands investment around is Suncor [TSX:SU; NYSE:SU], one of Canada’s oldest and largest oilsands producers.
”It’s the one the market will go to in times of when things turn around, looking for the best liquidity, but that means it also carries the richest evaluation.”
Similar to Suncor in terms of size is Canadian Oilsands Trust [TSX:COS.UN]. It’s Canada’s largest income trust and is a pure-play oilsands investment as its only holding is a 35.49% stake in the Syncrude joint venture, currently the largest oilsands project.
Because Syncrude’s latest, C$8.3 billion expansion is expected to come on stream next year, it’s a good bet that the trust will be in a position to substantially increase its dividend as cash flows increase and spending tapers off.
Most of Canada’s large energy companies are also building substantial oilsands projects.
Investing in companies like Nexen Inc. [TSX:NXY; NYSE:NXY], Canadian Natural Resources [TSX:CNQ] or Petro-Canada [TSX:PCA] is a way to get growing oilsands exposure but still be somewhat diversified.
Mark Friesen, an analyst with FirstEnergy Capital in Calgary also points out that larger companies are able to bring their own staff to work on projects and are therefore are not as susceptible to the growing labour shortage for these projects.
”The bigger you get, the more comfortable you get with finance-ability and in-house talent that you have to execute, but the less direct impact you get to a particular play.”
One way to get the advantages that these bigger companies bring, while still getting the full exposure of a pure-play oilsands company is to invest in companies which have minority stakes in these large projects.
Western Oil Sands Inc. [TSX:WTO] holds a 20% stake in the Shell-operated Athasbasca oilsands project, currently the smallest of Canada’s three open-pit mines.
Opti Canada [TSX:OPC] has a 50% stake in the C$3.5 billion Long Lake project currently being built by Nexen. The advantage here is that the project is well underway, but upside – and risk – remains as start-up is still many months away.
And finally UTS [TSX:UTS] went from a junior stock worth less than a dollar last year to a viable company with the addition of heavyweight partners Petro-Canada and Vancouver-based miner Teck Cominco to help build its Fort Hills project.
While UTS could potentially provide the largest upside, the Fort Hills project remains years away from production, with large unknowns in terms of capital exposure and timing as companies jostle for position in the construction queue.
By James Stevenson –
© The Canadian Press 2005
Photo credit: Gord McKenna via Visual Hunt / CC BY-NC-ND
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