** Full disclosure ** I own 10,000 shares of Connacher Oil & Gas
While investors have been racking up significant gains in the Canadian oil sands stocks over the past year, the ride may just be beginning.
According to a recent report by Analyst Raymond James, "The best time to buy an oil sands company was five years ago ... The second best time is right now." The report is aptly titled: The Oil Sands of Canada -- The World Wakes Up: First to Peak Oil, Second to the Oil Sands of Canada.
Mr. James makes the point that the "low-hanging fruit" of global oil reserves have been picked clean. To find new, substantial reserves, oil producers often have to deal with extreme conditions -- Like drilling in ultra-deep water, the severe Arctic, or in politically unstable areas of the world.
Venezuela, Russia, Nigeria, and the Caspian Sea are not only unstable, but they are also far less attractive than the neutral country of Alberta, Canada. Furthermore, the governments in Venezuela and Russia seem increasingly intent on helping out the Chinese at the expense of the West.
The report concludes that, "Every investor should be exposed to the oil sands sector in a significant way because it provides growth from a known resource at a time when global oil production is getting more difficult to add, and demand continues to increase. Moreover, the oil sands resource is economic to develop, and it resides in a politically-stable country that happens to be next door to the largest energy consumer in the world."
The big players in the Athabasca tar sands (Exxon, BP, PetroCanada, etc.) have been lobbying the SEC to expand the definition of "oil sands reserves", and a favorable decision appears imminent. From a pure reserve standpoint, only a tiny fraction of oil sands assets can currently be booked as reserves -- This is another insane lag in the Canadian Energy Accounting Rules.
Given the power of lobbying, my guess is that these arcane and obsolete "reserve rules" will be thrown out in 2007 -- And those savy investors who own tar sands reserves will see a windfall of valuation expansion.
February 8th, 2006 ... Energy companies paid $566 million for undeveloped acreage in Alberta, Canada -- Most of which were in oil sands leases -- A record amount driven by booming interest in Canadian Oil Sands. The fattest bonus by far in the February 8th auction was $465 million (Canadian) paid by an "unnamed" company for oil sands lands in Northeastern Alberta. That in itself was the largest amount ever paid for one package of lands in an Alberta sale.
This recent sale makes Canadian oil sands plays worth at LEAST $25 a share.
Which brings me to Connacher Oil and Gas.
Connacher Oil and Gas is a Calgary-based Canadian oil and natural gas exploration and production company. Its principal asset is a 100 percent interest in 107 sections (68,480 acres) of oil sands leases at its Great Divide oil sands project near Fort McMurray, Alberta. It also maintains conventional production at Battrum, Tompkins, and Steelman Saskatchewan. In pursuing its objective of maximizing shareholder value, when possible, Connacher secures large operated interests. Over time, a balanced portfolio of oil and natural gas interests are rapidly being pursued. An opportunistic approach, supported by timely decisions, reflects management's experience and aggressive strategy towards realizing growth objectives. Connacher also owns 40 percent of and manages Petrolifera Petroleum Limited, which has interests in Argentina and Peru.
Connacher is valued at about $280 million (Canadian) by market standards. As it stands now, the company controls recoverable reserves of 311 million barrels of oil, equating to about 2.33 barrels per share. With Connacher, you get 2.33 barrels per share at a nice low valuation.
The potential for reserve growth at Connacher's Great Divide property remains significant and reserves could prove to be a multiple of the present figure. But the tremendous upside for Connacher is that they DO NOT have to take on a partner to handle the extraction infrastructure.
Most importantly, Connacher will be extracting more than 10,000 BOE/day by the fourth quarter 2007. Priced in at a conservative $50+ oil, the company will see cash flow of over $1 (Canadian) per share. On that basis alone, Connacher will easily be valued at twice the current share price.
While the majority of Canadian oil sands companies are essentially in the earth-moving business, Connacher uses "Steam-Assisted Gravity Drainage" (SAGD) technology to extract bitumen from the tar sands. SAGD is a proven technology that involves drilling horizontal wells and constructing a processing facility that separates oil and water, generates steam, and recycles water. It is a cheaper, cleaner, safer, and quicker method of extracting oil. And as a result of the Great Divide's amenability to SAGD, Connacher does not need to take on a partner and give away 60% of its project. Nor does it need a 5-year construction period in a rising cost environment.
In addition, on March 31, 2006 Connacher completed the aquisition of Montana oil refiner Holly Corp. The refinery agreed to sell Connacher its Montana Refining Company, an 8,000 barrels-per-day refinery in Great Falls, Montana. The purchase price for the assets, including inventories, was $55 million and consisted of cash and 1 million shares of Connacher common stock.
In my opinion, that aquisition was a great business decision for Connacher as they now have refining capabilities for their oil in the United States.
A+ in my book, and all the more reason to own as much Connacher Oil & Gas stock as you can.
Buy recommendation: Accumulate shares under $5.00
Posts: 8 | From: Arizona | Registered: May 2006
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In my beggining days of energy stock research, 2+ yrs ago, Canwest was at 22 cents, Deercreek at 7 can$ (now the big french national oil company owns DeerCreek at $33 can $/share) and Connacher was at $1. I was not aware of the potential of oil sands. We lost out on some great buys.
I agree Connocher will go much higher this yr.
-------------------- Do not invest on any of my suggestions Posts: 1215 | From: baton rouge | Registered: Apr 2006
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