Risks for Oil Sands Investors - ZT

Epic · 发表于 2014-4-27 15:11

Hear that? That’s the sound of money slowly draining for the coffers of the Alberta energy industry. Every day, new challenges threaten to slow or stall oil sands development. And depending on how they’re worked out, it could cost shareholders dearly. Here are the top three risks energy investors should be watching.

1. Rising natural gas prices

Oil sand companies, which have benefited from rock-bottom natural gas prices, are once again facing rising costs. Dry gas rates have doubled over the past six months thanks to an exceptionally cold winter in North America. However, prices could continue higher in the coming years as demand for natural gas perks up and liquefied natural gas exports begins to drain excess supplies.

Increasing gas prices would hit steam-powered projects the hardest. These projects use super-heated water vapour to soften bitumen deposits to the point where they can be drained and pumped to the surface. Natural gas is a necessary expense in this type of extraction method. If the prices increases by just one dollar, operating costs per barrel would jump by the same amount.

However, not all companies are exposed equally. A number of oil sand producers — namely Imperial Oil, Cenovus, and Canadian Natural Resources – have extensive natural gas operations providing a natural hedge to rising prices. However, other companies like Suncor (TSX: SU)(NYSE: SU) and Connacher Oil and Gas are the most at risk.

2. Rising shipping costs

It’s getting more expensive to ship a barrel of oil. Thanks to a combination of new pipelines, larger payouts to landowners, and more stringent regulations, the cost to move oil sands bitumen out of Alberta is rising. According to the National Energy Board, the total cost of moving oil and gas on Canadian regulated pipelines has increased 60% over the past five years.

Stepped-up regulations threaten to make this problem worse. Nowhere is this better illustrated that Enbridge’s (TSX: ENB)(NYSE: ENB) Northern Gateway proposal, where regulators only granted the pipeline’s approval if the company met a list of 209 conditions. Notably, Enbridge will have to spend an extra $500 million of extra pipe to protect against ruptures and maintain $1 billion in liability insurance to cover the clean-up costs of possible leaks.

Delays are also pushing up the cost of transporting crude. TransCanada (TSX: TRP)(NYSE: TRP) has sunk $2 billion maintaining pipe in the field for its Keystone XL pipeline while it waits for the U.S. government to approve the project. Ultimately, all of these costs will be passed on to the shippers.

3. The carbon bubble

As we burn fossil fuels, the world is getting warmer. In order to mitigate the worst effects of climate change, nations have agreed to limit global warming by two degrees centigrade.

To stay under this target, scientists estimate that global carbon emission need to remain under 500 to 900 gigatonnes through 2050. However, that’s far less than all of the world’s currently booked recoverable energy reserves. Even assuming an optimal rollout of carbon capture technology, most of the energy industry’s oil, coal, and gas reserves are essentially unburnable.

Carbon intensive assets like the oil sands are particularly sensitive to this problem. Consider Suncor’s recently approved Fort Hills mine. At current commodity prices, this project generates a 12.5% internal rate of return — probably the minimum shareholders will accept for such a risky venture. Environmental policies are also a risk. The impact of even a small tax on carbon would quickly render the play uneconomical.

Foolish bottom line

Alberta’s oil sands have overcome a lot of hurdles. Only 50 years ago, the play amounted to nothing more than a backwoods science project. Today, the oil sands are one of the most important developments in North America’s energy industry. How the industry deals with these three risk factors will be the biggest driver of shareholder returns over the next decade.

Epic · 发表于 2014-4-27 23:51

The Canadian energy sector is benefiting from weakening of the Canadian dollar and the narrowing price differential between Canadian heavy crude and West Texas Intermediate (WTI). In the current scenario companies such as Suncor Energy (NYSE: SU ) and MEG Energy (TSX: MEG ) , which have solid track records of delivery and strong asset positions, should be the focus of investors' attention. Both Suncor and MEG are high-quality producers with exposure to growing oil production. Canadian Natural Resources (NYSE: CNQ ) is also well positioned to benefit from this favorable scenario.

Production to grow significantly
After a year of extreme volatility, punctuated by export constraints and deep discounts on heavy oil, things are looking much better for the Canadian oil sector. Lately the large-cap Canadian E&P sector has been dominated by rapid growth in heavy oil production, driven mainly by oil sands growth. The Canadian Association of Petroleum Producers (CAPP) is forecasting Canadian oil production to grow from 3.5 million barrels per day (mbpd) in 2013 to 4.2 mbpd through 2017. Furthermore, CAPP predicts production will grow to 6.7 mbpd by 2030 (almost double 2012 production of 3.2 mbpd). This forecast includes the oil sands production of 5.2 million barrels per day by 2030, which is up from 1.8 million barrels per day during 2012.

Price differentials expected to narrow
Despite significant growth in production, the Canadian heavy oil differentials are expected to narrow year on year. This is primarily driven by the increased rail capacity, the start-up of Flanagan South-Seaway Twin in the second half of 2014, Keystone XL South, and the increased heavy oil demand driven by the start-up of Whiting and restart of CITGO.

The gap between the prices of Western Canadian oil and WTI has largely been due to poor infrastructure. The flow of oil from Canada to the U.S. is becoming increasingly difficult. While more and more companies are shipping oil by rail now, the approval of Keystone XL can largely resolve the supply problem. Nevertheless, the extended periods of elevated differentials are behind us now, and there appears to be ample takeaway capacity through 2017. However, beyond 2017, alternative solutions such as Northern Gateway, Keystone, Energy East, the Trans-Mountain pipeline expansion, and the Line 9 reversal may be required.

Suncor Energy
Suncor Energy is the best positioned stock in the Canadian large-cap sector. The company offers investors a compelling combination of an advantaged integrated business model, low political risk, an above average long-term production growth profile, and strong free cash flow generation ability.

The company is also strategically positioned. It is one of the few companies with its onshore North American production naturally hedged by a significant downstream segment. Suncor's strategy of optimizing its current asset base and returning more cash to its shareholders has also resulted in higher returns and a more balanced outlook for production growth. Suncor recently increased its dividend by 15%.

Finally, despite a strong profile, the company is trading at a discount compared to its large-cap North American peers. Suncor has forward price/earnings and price/book ratios of 11.4 and 1.4 respectively compared to 12.5 and 2.4 for ExxonMobil. Warren Buffett also considers Suncor a value buy and invested more than $500 million (~18 million) in Suncor last year. Although his company Berkshire Hathaway sold 5 million Suncor shares in December, Berkshire Hathaway still owns ~1% of the company.

MEG Energy
Driven by significant cash flow growth potential, a differentiated marketing strategy, and its transition toward the self-funding model, MEG Energy is another Canadian large-cap E&P company looking at a strong 2014.

MEG is a high growth oil sands producer and offers investors a portfolio of premium assets and several key strategic advantages. The company is among the lowest cost producers in North America. The company's development projects have a full-cycle cost of supply in the $35-$55 per barrel range. Moreover, these projects are expected to drive annual average production growth of 25% through the end of the decade. Finally, MEG's early emphasis on infrastructure and marketing arrangements provides another key strategic advantage to the company.

Despite a superior growth profile through the end of the decade, MEG is trading at a discount compared to its E&P peers. However, this should change, and the company should see its multiple expand as its cash flows approach capital expenditures and financial risk is reduced later this year. The significant production and cash flow growth over the next twelve months, and the de-risking of the company's future development phases, should result in share price appreciation and narrow the discount it trades at compared to its peers.

The Next Industry To Crumble...

Imagine owning Amazon.com (up over an insane 4,000% since 2001) when Internet sales rendered big-box retailers obsolete...

Or Apple (up over a mindboggling 6,000% since 2004) when smartphones made landlines irrelevant.

Now an industry 99% of us use daily is set to implode... And 3 established companies are perfectly positioned to take advantage of this game-changing economic shift.

Epic · 发表于 2014-4-27 23:52

Guess who is the newest addition to the 52-week high list? It’s Canada’s lumbering energy giant Imperial Oil (TSX: IMO).
Over the past year the stock has delivered a remarkable 30% return for shareholders. Yet in spite of the run-up, the company still has several catalysts that could drive its share price further.

1. Great growth prospects

Imperial is a powerful company with a rock solid balance sheet and diverse set of growth opportunities. Today, the firm is sitting on 16 billion in proved and non-proved barrels of oil equivalent with properties spread across the Horn River

pingguo · 发表于 2014-5-19 15:55

Very nice sharing. Thanks a lot!

账号		自动登录	找回密码
密码			注册

[投资] Risks for Oil Sands Investors - ZT