A perfect example of China’s proactive approach to securing their energy future was their purchase earlier this year of ConocPhillip’s 9% stake in Syncrude Canada. China paid $4.65 billion for this 9% stake which is interesting for reasons other than their interest in long lived oil reserves.
The price China paid for Conoco's stake implies value of $517-million per 1% interest in Syncrude. Canadian company Canadian Oil Sands Trust has only one asset, and that asset is a 36.74% interest in the Syncrude oil sands joint venture. And if you go to the trouble to do the math this translates to a $37.36 per share price for Canadian Oil Sands, based on its 36.74% interest in the Syncrude oil sands joint venture.
As I write this shares of Canadian Oil Sands Trust are trading for $24.90 which suggests that there is exactly a 50% upside to get to the price that China paid for the ConcoPhillips stake in Syncrude.
And while you wait you can collect a quarterly dividend that is currently 50 cents per unit or an annual yield of 8%.
While the current valuation metrics are attractive to me, what is really interesting is the extremely long life of these reserves. Canadian Oil Sands Trust will still be producing oil 30 years from now. By then oil prices of $75 are going to be a long distant memory and the value of Canadian Oil Sands assets will have increased significantly. In other words you get the double whammy of buying today at a discount at $75 oil and then also get significant value increases as oil prices increase in the coming years.
On a reserve basis here is what Canadian Oil Sands Trust Has:
1.9 billion barrels of proved and probable reserves
1.8 billion barrels of contingent reserves
0.7 billion barrels of prospective reserves
Daily production rates are expected to grow and Syncrude from 300,000 barrels per day currently to 500,000 barrels per day by 2020. Remember that Canadian Oil Sands Trust receives about 37% of this. At the end of this year the company will move from an income trust tax structure to a corporation. In the medium terms COS has tax pools which will offset much of the increase in income taxes.
As this is a pure play on the oil sands the share/unit price is going to move around with the price of oil. To me this is a good thing as eventually I expect that to drag the share/unit price much higher. Of course at some point it could very well be that the Chinese come knocking at the door and secure these long lived resources at a premium price. If they liked ConocPhillips stake, why wouldn’t they come back for the big piece of the pie.
If you are like me and are looking for more exposure to oil for your portfolio, here are some ideas:
ATP Oil and Gas