Canadian Oil Sands (COS.TO)

We are starting to get movement in the energy patch, especially in Canada. His model price is $38.11, a 70% upside. 6.25% dividend yield.

Good, solid investment in oil. From his perspective, it is a bit of a capped investment. Growth in oil production is relatively muted here. Doing expansions at Syncrude but it is basically buying a piece of it. Syncrude has been kind of stagnant in terms of where it’s at for the last 5 years. Maintenance capital expenditure for the last 10 years has been much higher than had been expected. Has no problem with the company, but just don’t look for a lot of growth out of it.

Oil sands producers in general have been treading water. In this company’s case, it has been largely because Syncrude has been expanding a lot and there have been huge capital expenditures so the debt level has gone up a lot and the dividend has not gone. Starting next year, capital expenditures start to plummet as the expansion becomes complete. Thinks production will start to go up. Unlike a lot of other producers, Syncrude produces light sweet crude, which gets a slight premium to market price, not a discounted price. They are not subject to Keystone. 6.4% dividend yield.

In the last 2-3 years there has been an enormous boom in oil/gas production in the US, based on a lot of new technology being used to add reserves and production. A lot of that is coming in at very low costs. Feels there is a risk to some of the big Western Canadian oil companies that are higher cost producers. If prices were to stay muted because of all this new production, they are not as profitable. He prefers to focus on very low cost producers, which is more of the midsize companies. If oil prices can stay firm and the economy really does start to pick up and supports oil at higher levels that would be of great benefit to companies like this.

Iran and Libya production restarts should not have too much affect on this company because it has been dogged by differentials between Canadian oil and US lighter oil, given the transportation bottlenecks. Some of these situations are set to ease this year. The Whiting refinery conversion and coker expansion are set to come momentarily. That’s a couple of hundred thousand barrels a day. Enbridge Flanagan South pipeline comes on at about 600,000 barrels a day, as well as rail shipments. This should help alleviate some of the differential exposure, which should be very positive for Canadian oil companies in general, especially those with exposure to oil sands. Where there might be some issues is that they primarily sell synthetic crude, which might get displaced by some of the heavier crude going to Whiting. Not a huge fan of this. Pay a high dividend but don’t really earn the dividend on a consistent basis. (See Top Picks.)

(Market Call Minute) No rush to get in here. Oil will be sideways and it is all about cost of production for them.

(Market Call Minute.) Not interested. Had some real problems. Poor cash flow. Production guidance is down.

(Market Call Minute.) You want to watch this. Syncrude project is not running at optimum capacity and utilization. Nice yield and a solid asset.

Had a fairly significant CapX program a few years ago that she didn’t like and sold her holdings. They are pretty well through that now. They do not hedge their production so they can be a little volatile. However, the dividend has been maintained. She would prefer Cenovus (CVE-T).

The most exposed to the price of oil. If you are really bullish on the price of oil and think it is going up, you definitely want to be buying this. However, if you think oil is going down, you want to Sell. One of the few dividends that is tied to the price of oil, rather than how the company is doing. His issue is that there always seems to be a problem with their operations. He thinks you can find better opportunities elsewhere. (See Top Picks.)

Price of crude has the most impact on oil sands. This will move with the price of oil. Decent dividend of 6.6%. Prefers other oils in his top picks today.

This has always been his strongest recommendation in his newsletter. The company has always said that the dividend will vary depending on what the price of oil is, the price of gas and there CapX expenditures are. Reasonably profitable at the moment. If they do cut the dividend, no one should be surprised, because it does move up and down.

He is reducing his position on oils because of his outlook on oils. There will be plenty of supply hitting the markets in the next 2-3 years. We know where 90% of the oil is in the world and most is accessible through horizontal drilling. He thinks there is some head winds and there will be no uplift in energy. Oil field services companies would be a better choice. He has Alta Gas.

Marketplace should pay attention to the price that the oil sand producers are getting per barrel of oil in Alberta. Back in January they were getting as low as $57 and then we had a really good run into July where they were getting $90 a barrel. Spread on WTI has come down and we are now seeing $70-$71 a barrel. Quite a big difference of $20 from the high. Heavy oil has more than a little cloud over these days. Wouldn’t feel that the dividend is totally safe. (See Top Picks.)

If you want exposure to the growth in the oil sands, this is actually a decent way to play it, but he thinks there are better ways to play it. He would prefer Suncor (SU-T). For income investors this can give you a pretty decent return.