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Is the Most Profitable Oil Sands Play Outside of Canada?

May 23, 2014 | About:
CanadianValue

Canadian Value

110 followers

I always get a bit of a kick out of watching the talking heads on the financial networks discuss the oil markets. Most of the coverage is focused on the weekly numbers that may or may not provide insight on the ultra short term supply and demand.

I often hear as an explanation for why oil prices have decreased on a given day being that oil demand is plummeting. To me, that seems silly.

I'll grant you that when the world was falling apart at the end of 2008 oil demand plummeted, but in virtually every other year oil demand is very predictable.

It is on a long, relentless (and concerning) creep higher.

Here is what oil and all energy demand/consumption has looked like over the past century:

Are you able to spot a trend? It is subtle, but I think most would agree that it is increasing.

I have another graph. This one helps explain why energy demand/consumption keeps rising. Here it is:

This graph of course captures the increase in global population over the same time period. It does make a lot of sense that two people would consume more energy than one. And we haven't just doubled the number of people in the world over the last 100 years, we have increased the number of people seven times.

I would say then that it doesn't involve taking a giant leap if I were to suggest that if the global population keeps increasing, so too will the amount of energy we consume.

A big part of future energy demand therefore involves understanding where the population of the world is headed.

According to Exxon Mobil (XOM)'s 2013 Energy Outlook we are going to add another 2 billion people to the planet between now and 2040. That should virtually guarantee that our energy needs are going to keep going up.

And there is even more to the story that should make where our future energy demand levels are going even more obvious. The amount of oil and energy consumed per person is also increasing every year.

In North America, Europe and Japan we consume a lot of energy. In fact, we consume on a per-person basis multiples of the energy that the billions of people in India, China and the emerging world do.

Every day those people in the emerging and heavily populated world strive towards our lifestyle and their per capita energy consumption increases.

That creates two big drivers of energy demand:

- Population growth.

- Per capita consumption growth.

In the coming decades we are going to need every available barrel of oil that we can produce to fulfill this growing global thirst for oil. That tells me that oil prices are headed higher, and I want to profit from it.

I plan to do that by getting exposure to as many barrels of oil in the ground as possible for each dollar I invest.

I’m not just talking about proved and probable oil reserves, I’m talking about raw barrels of oil in the ground. I believe that as the years go by, with rising oil prices and improving technologies barrels of oil that today don’t seem incredibly valuable will see an exponential increase in value.

Taking oil that was not of much use to anyone and turning it into profitable oil production is what took shares of Suncor from under $1 in the early '90s to $40 today.

I recently came across another oil sands player that is sitting on a vast quantity of oil that is currently being valued for pennies on the barrel. What intrigues me about this company is that these oil sands barrels may turn out to be the least expensive to get out of the ground.

The weird thing is that this company isn’t located in Northern Alberta; it is based in the U.S. The company is called American Sands Energy Corp (AMSE).

American Sands Energy - Background and Properties

One of the primary challenges of the Canadian oil sands is its location in the remote north in the province of Alberta.

Getting supplies, equipment and people this far north is expensive. American Sands Energy is also an oil sand resource company, but it is located near Sunnyside Utah (150 miles southeast of Salt Lake City) which is a location that does not suffer the same challenges.

On the Sunnyside lease AMSE has the rights to mine oil sand ore and extract bitumen from approximately 1,800 acres of private property.

The Sunnyside area contains some of the prime oil sands deposits in Utah. AMSE controls an estimated resource of approximately 150 million barrels of recoverable bitumen, according to a Resource Audit and Classification prepared by Marston (a Golder Associates Company).

The planned plant and mine site is approximately seven miles from an existing power plant, rail head, and major state highway. The site is accessible by County road and will be served by existing power lines.

I would note that the proximity to rail transportation could be key to transporting the oil and keeping transportation costs low (there are six refineries in Salt Lake City with capacity of 185,000 barrels per day).

In March 2014, AMSE filed its application for an operating permit with the Utah Department of Oil, Gas and Mining. Initial production from the Sunnyside location is planned at 5,000 barrels per day which the company hopes to have online by the summer of 2016. Eventually AMSE plans to take production up to 50,000 barrels per day from its existing resource base.

The intended plan is to mine the oil sand ore using conventional mining techniques along with a proprietary solvent that can extract the oil from the oil sand ore.

In the 1980s and 1990s Chevron and Amoco probably spent $30-$40 million drilling on the property. That drilling has provided 130 core hole logs that American Sands Energy submitted in its mining permit application.

In addition to the drilling that was done Amoco prepared a complete mining plan for both a 25,000 and 50,000 barrel per day mining operation which AMSE was able to leverage when preparing its own plans.

In addition to its existing 150 million barrel resource base, American Sands Energy has the potential to access another 950 million barrels on adjacent parcels of land. The company has been in contact with the holders of this property and believe that when ready, acquiring the rights to this property shouldn’t be a problem.

This is the kind of leverage to barrels of oil in the ground that interests me. American Sands Energy is a small company, but it has the inside track on the development of almost a billion barrels of oil.

Today those barrels of oil in the ground aren’t valued as being worth much. Only a small change in the valuation the market assigns per barrel will have a huge impact on the share price of AMSE (more on valuation later).

American Sands Energy - Technology / Development

The easier to access location in Utah isn’t the only thing that differentiates the American Sands Energy oil sands play from the deposits in Canada. The actual sands themselves are different.

Canada's oil sands are saturated with water and are known as "water wet". Meanwhile, in Utah, the oil sands are known as "oil wet" because they are wet with oil instead of water.

The Utah deposits are very dry, which means that the production of them does not result in the production of water. That is vastly different than the Canadian oil sands where large quantities of water have to be dealt with. No water means no tailings ponds which is a big bugaboo for the Canadian oil sands and a big plus for Utah.

The production process that AMSE is going to apply (and has an exclusive license in Utah for) to its oil sands uses a proprietary solvent solution that separates the oil from the sounds.

Since AMSE isn’t going to need to handle huge amounts of water, its production cost should be lower and more environmentally-friendly than traditional oil sands operations.

AMSE estimates that its energy costs could be as much as 60% lower than a Canadian oil sands mining operation which involves the use of expensive steam generating facilities. Startup capital should also be much less as there is no need to plan, design and build a tailings pond.

The ASEC solvent extraction process starts with the mixing of oil sand ore with a proprietary solvent. The solvent immediately separates the hydrocarbons contained in the ore from the inorganic insoluble material such as sand, rock and clay.

The liquid hydrocarbon/solvent mix is then separated from the clean sand by gravity and a series of filters. The sand is heated to evaporate the solvent contained in it and the resulting solvent vapors are condensed and reused. The clean sand can be returned to the mine site as reclamation material or potentially sold for industrial purposes.

The liquid hydrocarbon/solvent mix is subject to a simple, refluxed, low pressure, medium temperature distillation process to separate the solvent from the recovered hydrocarbon. The solvent distilled from the recovered hydrocarbon is condensed and reused. The extracted bitumen is sold and then transported to a refinery.

Lab and pilot plant tests have successfully undertaken on oil sands from the Utah Green River Formation to prove the viability of the technology and to understand several key elements in the process.

There is actually video of the technology:

The permit for commencement of production has been filed by AMSE with the Utah regulatory body with the review of the application expected to be completed in 2014.

The first stage of development will be a 5,000 barrel per day project, with longer term goals being 50,000 barrels per day at Sunnyside and potentially joint venturing the proprietary process with other operators.

American Sands Energy – Finances / Valuation

The initial plan for AMSE is to develop a 5,000 barrel per day mining operation. The total capital cost for this is expected to be $75 million which equates to a very attractive $15,000 per flowing barrel.

At $80 WTI (current price is north of $100) American Sands Energy believes it can generate $40 million of EBITA. At $100 WTI American Sands Energy’s EBITA would be closer to $65 million.

Assuming that all of the Series A preferred shares are converted into common, there are about 52 million shares outstanding (no net debt) which puts the enterprise value for AMSE at $33 million.

That would mean that AMSE is trading at about one time the projected EBITA (at $80 WTI) for 5,000 barrels per day of production. At $100 plus oil prices projected EBITA the company would be trading for well under one time.

However, there is going to be financing required between now and then, so it is tough to estimate value here relative to the expected EBITA generating power.

I believe a better metric today would be the price at which other barrels of oil sands resource have been sold at in an undeveloped state. I think that metric points to AMSE being attractively priced in the market.

Again, assuming the Series A Preferred shares convert to common, AMSE has an enterprise value of $33 million. With 150 million barrels of identified oil sands resource that means that AMSE is trading at $33 million / 150 million = $0.22 per barrel.

The chart below compared the AMSE valuation with acquisitions of oil sands resource that had reached the permitting stage (like AMSE has). At the time the chart was prepared AMSE was trading at $0.40 per barrel and was already priced well under the norm.

Today the company trades at half that $0.40 per barrel valuation, and is valued at about one-third the valuation of the average “in-permitting” oil sands resource transactions that have occurred in recent years.

It could actually be argued that AMSE’s barrels should be valued at a premium given that the Utah Oil Sands have several advantages over Canada’s oil sands. The most important advantage for valuation purposes being that the Utah Sands are expected to have a breakeven oil price of $45 per barrel which is half of what a new oil sands project needs.

The key takeaway from a valuation perspective for me is that AMSE is trading at $0.22 per barrel of oil sands resource while the average of recent transactions is three times that. If AMSE’s production technique works as expected its oil production will be worth considerably more than the oil barrels that were being purchased at those higher levels.

As a point of interest I’ve also included below the company’s comparison of its expected economics with horizontal oil production. American Sands Energy expects to be a far lower cost producer than both of the major sources of new oil in North America today.

American Sands Energy – Top Management

William C. Gibbs - Chairman of the Board and CEO

William Gibbs became involved in the oil sand industry in the mid 1980s through a joint venture project with Chevron. Since that time, he has served on boards of directors of both public and private companies, and has structured and negotiated over $2 billion in financings and acquisitions. He has also structured and negotiated oil and gas leases, technology agreements, out-sourcing agreements, operating agreements and management contracts. Gibbs was a partner in a merchant banking firm which specialized in the financing and business development of emerging companies and a partner in a large law firm specializing in private placements, public offerings and other financings, mergers and acquisitions. Gibbs received his law degrees from Georgetown University (LLM, Securities Regulation), the University of Utah, and Magdalene College (Oxford University) (J.D.). He also has a B.S. in economics from the University of Utah.

Dan Carlson - Director and CFO

Daniel Carlson has been in the finance industry for over 20 years, with a particular focus on energy and natural resources for the last 10 years. Prior to joining American Sands, he most recently served as the CFO of LIFE Power & Fuels LLC, a large investor in ASEC. Dan was a co-founder of LIFE, a seed investor and business partner in startup companies focused on natural resources and energy. He was also a co-founder and former CFO of Colombia Energy Resources, an OTCQX traded company. Over the course of his career, he has assisted many companies with going public strategies and has raised over $200 million in financing for startups. Dan has a BA in economics from Tufts University.

Robin Gereluk - Executive Vice President

Robin Gereluk has been involved in the Canadian and international oil and gas industry since 1980. Under contract to Bower Damberger Rolseth Engineering (AMEC BCR), he has worked as an engineer in the petroleum industry in Canada, the U.S., the Caribbean, Latin America, Europe and Asia. Over the last 21 years he has been managing a team of professionals to provide engineering design, procurement, construction management and ongoing operational support on a wide range of oil and gas projects around the world. During that time he provided support to small and large multinational oil companies in the area of strategic development and provided assistance in the formulation of field development plans. He has also founded, been a shareholder and acted as a director in a number of energy service companies. He graduated in 1986 with a BSc. in petroleum engineering with honors from the University of Wyoming and is a registered professional engineer in several Canadian provinces.

American Sands Energy – Risks / Final Thoughts

This is obviously not a low-risk opportunity. The risks involved include the following:

- Commodity prices (fully exposed to oil prices).

- Financing is going to be required (dilution or debt, no guarantees what the terms will be).

- The proprietary production method is proven in a pilot but has not been rolled out in full-scale development.

- This is a small cap company with a small float so the stock price will be very volatile.

- Executive officers and directors hold 67% of the current outstanding float.

- The project permitting is still in progress and is subject to regulatory review and approval.

In exchange for this risk is I believe an opportunity for an outsized return. In buying American Energy Sands Corp today an investor is paying $0.22 per barrel for a commodity that is selling for over $100.

There is huge leverage here if this plays out well. Even valued at just $1 per barrel in the ground would the resource would be worth five times the current valuation. And that assigns no value to the other 950 million barrels of oil sands resource surrounding the Sunnyside deposit that AMSE is going have the inside track on.

What the market is going to wait for is proof that the technology works on a full scale development program

About the author:

Canadian Value
http://valueinvestorcanada.blogspot.com/

Rating: 3.4/5 (7 votes)

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Comments

AlbertaSunwapta
AlbertaSunwapta - 3 months ago

For anyone interested in this stuff, here's another named: US Oil Sands Inc. It's a speculative penny stock.

Here's an excerpt from their web site. Maybe someday.

"The Company's initial commercial demonstration project is located in Utah's Uintah and Grand counties where the Company has a 100% interest in bitumen leases covering 32,005 acres (50 square miles) of land, the largest commercial oil sands position in the United States. These leases contain a large resource base in excess of 180 million barrels of discovered petroleum which,..."

http://www.usoilsandsinc.com

Note: I have no holdings in this.

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