US Oilsands USO
July 15, 2011 - 6:35pm EST by
2011 2012
Price: 0.26 EPS $0.00 $0.00
Shares Out. (in M): 249 P/E 0.0x 0.0x
Market Cap (in $M): 65 P/FCF 0.0x 0.0x
Net Debt (in $M): 10 EBIT 0 0
TEV ($): 55 TEV/EBIT 0.0x 0.0x

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US Oil Sands (USO CN), which recently listed in Canada, is developing a large oil sands project in Utah that is trading at an extremely low valuation regardless of the metrics you choose.  USO has a patent-pending, demonstrated process for extracting heavy oil from oil sand ore in an environmentally friendly way.  The company is also unique in that it has the only permitted commercial oil sands development and extraction project in the US.  The company recently raised equity in order to advance engineering and increase their oil resource base. We believe the shares offer considerable upside as investors learn about the simple extraction process the company will utilize to tap their massive prospective resource base on US soil.     


USO has existed in some form as a private company for nearly a decade while developing and refining their oil sands extraction process.  Typical oil sands projects in Canada utilize large amounts of steam to liberate oil from the tar-like sands.  Due to high energy consumption (in order to produce the steam) and the necessity for large tailings ponds, traditional oil sands projects have become a target for environmental activists.  USO's process is very similar to that of many other oil sand projects but it substitutes much of the steam power for a chemical additive that company holds a production patent on.  The chemical is actually a safe byproduct of orange juice manufacturing.  The result is that USO's extraction process requires much less energy and also takes away the need for tailings ponds.  Ore is mined near surface, placed into the processing unit and the two items leaving the other end are heavy oil and clean sand that will be used to backfill the mined areas.   


While USO has been developing and refining the extraction process for over a decade, it is only recently that the company has moved forward with a production plan.  It so happens that the oil sands properties in Utah are more amenable to USO's extraction process than those in Canada.  The benefit of this is that the land containing oil sands in the US is extremely cheap due to the fact that no other project has discovered a technically feasible way to develop these resources, let alone in a manner that satisfactorily addresses environmental concerns (there is even a debate currently going on the in the US regarding construction of a pipeline to transfer oil produced from oil sands projects in Canada just because the source upsets environmentalists). 


USO has leased a large land package in Utah at minimal cost.  Sproule already analyzed two of the ore beds and put out an estimate of 177.8mm barrels of oil.  The company is now in the process of drilling and should put a new resource estimate out later this year that they believe should bring the number to over 250mm bbls.  The company's internal assessment estimates that the company is sitting at over 1bn barrels of oil.         

USO is designing modules that will produce 2,000 barrels of oil per day each (they already have a smaller scale test facility that has been running for a while).  The reason for designing them this way is that the modules are portable.  The portability allows the modules to be moved within the min, thereby saving ore truck hauling costs as the mine expands.  The company is initially looking to build 6-12 units over the next few years to bring production up to 12k to 24k barrels per day.  The capital cost per unit should be around $20mm and all-in operating costs per barrel (including mining, extraction, royalties, transportation and the heavy crude discount) are likely to be around $55/bbl (ie field netbacks of ~$30/bbl @ $85/bbl WTI).  While the netbacks are not particularly high, the low capital intensity of the facilities means that the economics are outstanding.  For example, each unit that will produce 2k bbls/day will cost ~$20mm or ~$10k/flowing barrel per day of capacity vs. large Athabasca oil sands mining projects (which should have the advantage of scale) costing over $80k/flowing barrel per day of capacity.    

In terms of valuation, if you assume $80/bbl oil and a 12 unit scenario, we come up with an NPV calculation of around $525mm or a bit over $2/share (vs. current share price of $0.225/share).  This scenario would utilize around 250mm bbls of the resource so would equate to ~$2/bbl.  Upside comes from an enlarged resource base (mgmt believes over 1bn barrels) and more 2k bbl/day units.  In the 12 unit scenario, the company will likely come to market for an equity raise later this year/early next year but then should be self-funding after that.  At today's EV of ~$50mm, the company would be trading at an EV/bbl of $0.20/bbl on the low end of their resource estimate (250mm barrels) and at $0.04/bbl on the high end of mgmt's estimate (1.25bn barrels).  Most oil sands peers seem to trade at anywhere between $0.50/bbl to $2/bbl.  Using the low end of the range would give you a stock price of between $0.50/share to $2.50/share.      

The recent financing that was undertaken by USO (concurrent with its public listing) raised just enough for detailed unit engineering and a drilling program to solidify their resource base.  The company's project is fully permitted and later this year the company will look to finance the construction of the first units.  There is likely an even a larger opportunity going forward as there are many oil sands deposits around the world that would be amenable to USO's environmentally friendly extraction process.  The company should gain considerable attention over the coming year due to its unique position, and upcoming catalysts.   


- Updated resource estimate
- Detailed engineering
- Increased market attention
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