Gavin Graham, The Canada Report
Gavin Graham is Vice-President, Director of Investments Guardian Group of Funds (GGOF) and is a contributing editor to The Income Investor. His qualifications include an MA in Modern History and membership in the Hong Kong Institute of Investment Analysts. Gavin managed investments for many years in the UK, the US and Hong Kong prior to joining GGOF in 1999. Mr. Graham is a regular market commentator, who appears frequently in The Globe and Mail and National Post as well as ROB-TV’s Marketcall.
Canadian Oil Sands Trust (TSX: COS.UN)
The business: Canadian Oil Sands Trust (TSX: COS.UN, OTC: COSWF) is a major player in the Alberta Oil Sands through its 36.74% interest in the Syncrude Project, located near Fort McMurray. Syncrude operates oil sands mines and an upgrading facility that produces a light, sweet crude oil. The Syncrude consortium was formed in 1964 with the official opening of the project and the first barrel shipped in 1978. Other Syncrude partners include Imperial Oil Resources (25%); Petro-Canada Oil and Gas (12%); Conoco-Phillips Oil Sand Partnership II (9.03%); Nexen Oil Sands Partnership (7.23%); Mocal Energy Limited (5%); and Murphy Oil Company Ltd. (5%).
Why we like it: Most conventional oil companies have proven and probable reserves of about twelve years. The Oil Sands reserves, in contrast, have a much greater life expectancy. Syncrude has proven and probable reserves of five billion barrels, representing a lifespan of approximately thirty-five years at current capacity. There is potential to extend reserve life beyond the year 2050 as the leases are developed. Syncrude is currently producing about 375,000 bbl/d (barrels of oil per day), but has plans in the works to increase that to as much as 500,000 bbl/d after 2016. The shares offer good cash flow (the quarterly distribution was recently increased 38%).
Financial highlights: For the quarter ended Sept 30, Canadian Oil Sands saw a 45% increase in its operating income to C$484 million and a 58% increase in its net income to C$361 million (C75c per unit) as the benefits of a full quarter of the Stage 3 upgrader were realized. With a US$4.57 per barrel increase in the price of oil received, to US$81.23, and a C$4 (16.5%) fall in operating costs per barrel to C$20.48, reflecting the efficiencies from full operation, the full benefits of the capital investment program are being seen.
Risks: The trading price of COS shares will be affected by movements in crude oil prices. A significant drop in the oil price seems unlikely, but if a deep worldwide recession takes hold it is a possibility.
The recent announcement of the increase in royalty rates by the Alberta government should not affect COS as it, like Suncor, has a separate royalty agreement. While the government has said it wishes to renegotiate these, they are binding contracts and while both companies have indicated a willingness to discuss some modifications with Alberta, at the end of the day they cannot be compelled to break the agreements, which run to 2015. In fact, Canadian Oil Sands has already seen its royalty rate rise from 1% to 25% in the second half of 2006 as it exhausted all of its tax breaks in building Stage 3 of its upgrader at Fort McMurray but still managed to increase profits by one-third. Other concerns are escalating construction costs in the Oil Sands which could significantly increase the expense of further expansion, and the possibility of some kind of carbon emissions tax.
How to buy: If at all possible, members are advised to buy units on the Toronto Stock Exchange where they are highly liquid and actively traded. The Pink Sheets should only be used if TSX access is unavailable, as volume is low and it may take some time to get a fill. If you use the Pink Sheets, place a limit order.
Summing up: COS is an excellent way to participate in the booming Alberta Oil Sands while enjoying good cash flow in the process. The long life of the reserves makes these shares doubly attractive.