Heavy Oil Investing News

By Duncan Sutherland – Exclusive to Heavy Oil Investing News

Brass tacks

In markets like these, it behooves investors, advisers, businesspeople and journalists to return to first principles. May I first offer a mea culpa for failing to forecast the precipitous decline in barrel prices? Sorry.

Getting down to brass tacks, the economic fundamentals of heavy oil and the oil sands are clear. Norval Scott and David Ebner offer an appraisal in this must-read piece in the Globe and Mail. Money quote:

“A new steam injection project now requires oil at US$70 a barrel to make money. For a mine, which includes an upgrader to turn the bitumen into synthetic oil, US$85 a barrel is needed for a project to make money, National Bank Financial said earlier this month.”

Another must-read on the current situation comes from Toby Shute at The Motley Fool. Find it here.

With this in mind, oil prices jumping around in the US$90 range should cause concern to investors. The prospect of further price declines in conjunction with extremely curtailed access to credit should be worrying to companies. It should be especially worrying to juniors and companies on the venture exchange. In the months ahead, one would expect consolidation in the oil sands, with small companies feeling skittish and larger operations seeing bargain-rate acquisitions.

Though it is customary for investment gurus to downgrade stocks in such times; from “buy” to “hold” or from “hold” to “sell”, Upgrader proposes a more practical reassessment of oil sands companies. As prices rose and activity in Alberta’s oil patch became frenetic, press releases and news reports focused on “plucky” junior firms with “innovative” technology. Concordant with this, Upgrader is downgrading these adjectives; when you next read “plucky” in this context, substitute it with “vulnerable”. For “innovative”, use “unproven”. This semantic re-evaluation will hopefully be more useful than a stock-by-stock analysis. The brass tacks of the market suggest mergers, acquisitions, sell-offs and even bankruptcies lie ahead.

Beating the market is a combination of information, foresight and luck. A glut of information is present these days. I would suggest that investors should think carefully about three major unpredictable factors. First, oil prices. Second, the results of the Canadian Federal election will have a huge effect on profitability for oil sands operators. See my article here for an in-depth look. Finally, the U.S. election will also change the business environment. I examined the likely results of each candidates’ proposals here. The Canadian article is a little out of date, but is in the process of being updated.

Company news

Petro-Canada (TSX:PCA) is apparently trying to get out of its Fort Hills Alberta project. Skyrocketing costs have forced a reappraisal for the company which holds 60 per cent of the project. The Globe and Mail is suggesting that US$100/barrel is the price point at which Petro-Canada will see a 10 per cent profit.

Xcite Energy (LSE:XEL) is waiting on a geological report from RPS Energy diagnosing the status and potential profitability of the Bentley North Sea field. The field is crucial for Xcite, as the company is hoping to use production there to vault it from Toronto’s venture market (TSX.V:XEL) on to the main TSX. Plucky indeed…

Good news for Total SA, (NYSE:TOT) as the French company will form a joint venture with Madagascar Oil to develop the country of Madagascar’s Bemolanga oil sands. The deposits are mostly undeveloped and are estimated to contain some 16 billion barrels worth.

Perhaps the last thing big oil sands operators needed right now was increased public pressure for divestment. Co-operative Asset Management is beginning a public relations effort to shame Shell (NYSE:RDS.A) and BP (NYSE:BP) into ceasing their operations in Alberta.