Canadian Oil Sands Trust COS-U W
September 13, 2004 - 6:16pm EST by
2004 2005
Price: 50.51 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 4,586 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Canadian Oil Sands Revisited (C$51-COS-u-TSX)

At $30, $35, $40 and $50 price per barrel of oil, the Canadian Oil Sands Trust is worth C$100, C$140, C$200, C$280 a share representing a 102% to 465% increase in the current stock price. In my second visit to this stock in a report, I want to prove how ridiculous the upside and opportunity is for the Canadian Oil Sands Trust and that it is the best idea of the year if not the decade.

Wonderful Oil Sands

The Oil Sands are truly a wonderful asset in these troubled times. They are listed as the second largest reserve of oil in the world and truly maybe larger than Saudi Arabia. I highly recommend investors go to Canadian Oil Sands’ website here:

Here are the main attractive features of the oil sands:

1) The reserves don’t run out. It becomes a question of how long the plant can run. 35 to 50 years is the answer.
2) Canada is a stable country. This cannot be understated as every oil producer and especially those with upside production potentials are high risk countries.
3) With its expansion, Canadian Oil Sands will be selling a premium crude.
4) A who’s who of oil and refining are partners, including Exxon (Imperial Oil) and ConocoPhillips.

Big Cost Overrun to Planned Expansion

In early March, COS announced a delay to their expansion and a cost overrun previous estimates by about C$2.1 billion. The market reacted fiercely to the news and drove the stock down as much as 25%. This reaction and sell-off kept pressure on the Canadian Oil Sands even as oil prices started to surge.

This facility is a very complex engineering project, and it really isn’t surprising that there would be a delay or that it would be more expensive than previously thought. The Canadian Oil Sands experience should serve as a warning to other oil sands companies (such as Canadian Natural Resources NYSE: CNQ) of the difficulties and obstacles to come as they start their oil sands projects. In fact, this is what makes the Canadian Oil Sands so attractive, that they are this far ahead in their project. Also remember, that the Syncrude project is being run by some of the best engineers from Exxon and ConocoPhillips.

A curious thing has happened since the cost overrun and delay. The price of oil has risen from $27 a barrel to as high as $50 and a recent $43 per barrel. On a net present value basis, a $2 to $3 rise in the price of oil offsets the costs and overrun making it a non-issue.

Additional Capital Raised

How did the Canadian Oil Sands Trust pay for this cost overrun? First, it raised $200 million in 5.55% five year unsecured notes in June, $200 million in senior notes at 4.8% in August and raised $144 million from a private placement of 3 million units to one Canadian investor in July. The price increase in oil made up the difference.

Institutional Investors Are Wrong on Oil

Institutional investors do not believe oil will stay over $30 in the long run. How do I know this? Fewer than half (44%) of US mutual funds hold an overweight position in energy stocks according the Merrill Lynch. That data point becomes more important when you realize that energy is only 7% of the S&P 500. So, most mutual funds have less than 7% of their portfolios in energy. This has shown up in the performance of energy stocks, which while beating the market in relative performance is lagging its commodity price. Oil has soared close to 40% this year, but energy stocks are barely up 15% on average. With the way the media has been headlining rising energy prices, one would think energy stocks would be soaring. It just hasn’t been the case.

I believe that most institutional investors believe that oil prices will crash hard and that the oil stocks will fall as well. Second, hedge funds have been more involved in the commodity itself through futures than through investing in the exploration and production companies. Third, oil and gas companies themselves have been pretty quiet on the mergers and acquisitions front.

One data point I find particularly compelling as to why oil prices will stay strong is that the cost to find and develop oil has soared 63% in the last decade. If oil was so easy to find and so plentiful costs should be flat or track inflation. What the rise in finding and development costs show is that it is becoming more difficult and more expensive to get at and develop new oil. It is not a surprise that finding and development costs are soaring as there have been no major oil field finds in the past 20 years. Consider that 70% of the world’s oil comes from fields 30 to 70 years old.

Six year future price of oil, no hedges after 2004, and the best of all worlds

The six year future price of oil is over $35 a barrel. This long term price picture of oil has enormous implications for COS. Especially since COS has no significant hedges after the end of 2004. This further illustrates how COS is the single most leveraged name to the price of oil and should perform extremely well as long as oil is over $30 a barrel.

The current price environment may not last. But oil is the revenue driver and cost driver is natural gas, which is needed in the process to develop the oil from the sands. The current price environment of higher oil prices and lower natural gas prices could not be more beneficial to COS.

2005 crucial peak year for capex

Estimates are for 2007…Let’s go to the Numbers:

Syncrude (mbd) 242 350 350 350 350 350
Trust Oil (mmb) 31.5 45.4 45.4 45.4 45.4 45.4
WTI Cushing (US$/bbl) 39.56 25.00 30.00 35.00 40.00 50.00
Total Revenue 1,677 1,537 1,836 2,134 2,432 3,029
Production 456 612 612 612 612 612
Purchased Energy 130 119 142 166 190 237
Other 72 91 91 91 91 91
Total 659 822 845 869 893 940
Crown Royalties 17 122 191 259 328 465
EBITDA 1,001 593 799 1,005 1,211 1,623
Non-Production 47 47 47 47 47 47
Interest 92 92 92 92 92 92
Capital expenditures 819 180 180 180 180 180
Free Cash Flow 43 275 481 687 893 1,304
Units 90.8 90.8 90.8 90.8 90.8 90.8
Free Cash Flow (C$unit) 0.48 3.02 5.29 7.56 9.83 14.37
Distribution (C$/unit) 2.00 3.00 5.00 7.00 10.00 14.00


Do you really believe oil will go significantly below $30? If you do, this is not the stock for you. But if you believe as I do that oil will stay at $30 or higher, there is no higher leveraged play than the Canadian Oil Sands. And while we wait for this expansion to finish we get paid a 4% dividend.

I think the stock could be a ten bagger by the end of the decade if oil rises to $50. Just look at the free cash flow and distribution capability at the different oil prices. At $30 oil, COS could pay a 10% dividend at current stock prices every year for the next 35 to 40 years. Will COS really be anywhere near C$51 if it is paying such a high dividend?


1)Continued progress in expansion
2)mid-2005 peak in capex
3)sustained $30 plus oil prices
4)Violence in any oil producing country
5)Peak in Saudi Arabian production
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